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Friday, September 24, 2004

Vanguard Reads Between the Lines

Reported by Theresa Sim

First, Vanguard closed two of its Primecap-subadvised funds to new investors. Months later, Primecap filed for three of its own funds. Fast forward to the present: Vanguard has decided to launch a new Primecap-subadvised fund. Did Vanguard read between the lines?

At the time of Primecap's proprietary fund filing in July, Brian Mattes, Vanguard spokesman, told the MFWire that Primecap had notified Vanguard of its plans to launch its own funds. Mattes also commented that Vanguard has successful subadvisory relationships with managers who also have their own funds (such as Wellington Management and Turner Investment Partners). Mattes said that he believed the Odyssey funds would be intermediary-sold.

But Primecap's July SEC filings for its Odyssey line of funds were suspiciously devoid of information, such as how the Los Angeles-based money manager planned on distributing the funds and the transfer agent for the funds.

That Primecap filed to open its own funds just months after Vanguard closed its two Primecap-subadvised funds prompted suspicion in the minds of many, including Dan Wiener, editor of The Independent Advisor for Vanguard Investors newsletter. After all, the Odyssey funds, if launched, would bring in more money (to be managed in very similar styles as the Vanguard funds) -- a move directly at odds with Vanguard closing funds for fear of asset overload.

In his Friday newsletter, Wiener writes that he suspects Primecap "forced Vanguard's hand" and did not intend to seriously launch its own funds. If that is the case, Vanguard's move can be seen as a method to placate the still-hungry Primecap stomach. Or perhaps a petulant Primecap managed to negotiate another Primecap-subadvised fund and launch its own fund line -- essentially having its cake and eating it, too? Either way, it means more money will be flowing to Primecap.

The official reason for launching the fund is, according to Vanguard Chairman John Brennan: “Vanguard has had a valued relationship with the PRIMECAP team for the past two decades…[t]he addition of Vanguard PRIMECAP Core Fund will broaden our array of actively managed equity funds and offer investors a core option that utilizes PRIMECAP Management’s research-driven investment approach."

Meanwhile, a search for filings for Primecap's Odyssey funds turned up nothing, besides its original July 1 filing. Only time will tell whether the Odyssey funds will become an actuality.

As for the new Vanguard Primecap Core Fund, Primecap managers will invest in domestic stocks, with up to 20 percent of the portfolio in foreign stocks. The fund's minimum investment will be $10,000; Vanguard and Primecap had not yet disclosed the expense ratio of the fund. 

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