Vanguard Inches Its Way Into the Liquid Alts Market

Vanguard Inches Its Way Into the Liquid Alts MarketYes, Vanguard – the big indexing advocate, and low cost investment proponent – is slowly moving its way into the liquid alternatives market. And in doing so, is not giving up on the low cost focus. On February 27, the company filed a Form N-1A with the Securities and Exchange Commission (SEC) announcing its intent to launch a new multi-alternative mutual fund: the Vanguard Alternative Strategies Fund. While the management fee is not specified, the total expense ratio is shown to be 1.10% for Investor Shares.

Buried deep in the filing is disclosure that Vanguard has been running an account with “investment objectives, policies, and strategies similar to those of the Fund” since September 11, 2009. Thus, at launch, the firm will have a 5+ year track record for the strategy. The prospectus does not indicate that the managed account will be merged into, or used to fund, the new mutual fund.

Managed Payouts Fund

On the same day as the filing, the company also issued a press release announcing the new fund will be added as an underlying fund, once launched, in the Vanguard Managed Payout Fund.

The Vanguard Managed Payouts Fund (VPGDX) is a fund of funds designed for retirees. In pursuit of consistent monthly payouts, the fund adjusts its allocations across a variety of underlying Vanguard mutual funds, and a commodities allocation. The fund is also designed to hedge against inflation and preserve capital during market downturns.

As of January 31, the Vanguard Managed Payouts Fund had the following allocations:

  • The Vanguard Total Stock Market Index Fund (VTSMX) – 24.5%
  • The Vanguard Global Minimum Volatility Fund (VMVFX) – 20.5%
  • The Vanguard Total International Stock Index Fund (VGTSX) – 15%
  • The Vanguard Total Bond Market II Index Fund (VTBIX) – 13.1%
  • The Vanguard Market Neutral Fund (VMNFX) – 9.9%
  • The Vanguard Total International Bond Index Fund (VTIBX) – 7.2%
  • The Vanguard Emerging Markets Index (VEIEX) – 4.9%
  • Commodities – 4.9%

Vanguard indicated that its Alternative Strategies Fund will receive an allocation of approximately 10% within its Managed Payout Fund, and the holdings of underlying funds listed above will be rebalanced proportionally.

Alternative Strategies

In August 2014, Vanguard published a whitepaper that was skeptical of liquid alts titled Liquid Alternatives: A Better Mousetrap? “We caution ‘buyer beware’ when contemplating the allure of the exotic,” the paper’s authors wrote, before quoting astronomer Carl Sagan: “Extraordinary claims require extraordinary evidence.”

Nevertheless, Vanguard has managed an equity market-neutral mutual fund (VMNFX) since November 30, 2007*, and the fund has performed well, too. Through February 28, the Vanguard Market Neutral Fund had generated a three-year annualized return of 3.07%, which ranked it in the top 17% of funds in its category. The fund’s standard deviation over that time was a modest 3.81%. The fund is also known for having the lowest fees in Morningstar’s market neutral category.

Vanguard’s new Alternative Strategies Fund is expected to launch in the second quarter of 2015. It will follow an actively managed approach by taking long and short positions in equities, forward currency contracts, commodity and Treasury futures, and other investments. The fund will be managed by Vanguard’s internal active equity management arm, Vanguard Quantitative Equity Group.

“We’ve planned for some time to broaden the investment strategies available to the Managed Payout Fund,” said Vanguard CEO Bill McNabb. “Adding the new fund as a component is expected to provide further diversification and reduce portfolio volatility as a result of the low correlations of these strategies to stock and bond returns.”

* Note that the Market Neutral Fund has a longer performance history, but was adopted by Vanguard and converted into its existing form on this date. The fund was previously the Laudus Rosenberg U.S. Large/Mid Capitalization Long/Short Equity Fund.