(PUB) Vanguard Advisor

DIRECTOR HOLDINGS Is the Henhouse Unguarded?

“Being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anx- ious vigilance with which (they) watch over their own. … It is the highest impertinence and presumption, there- fore, in kings and ministers to pretend to watch over the economy of private people.” “Mutual fund directors are either not being paid nearly enough for what they should be doing—or far too much for what they actually do.” — Jack Bogle, Smart Money, July 2012 IT’S A PERENNIAL QUESTION: Are Vanguard’s directors eating their own cooking—or, more to the point, are they even paying attention to how the meal is being prepared? Nothing motivates like money—par- ticularly, having your own money on the line. And in this case, very few of Vanguard’s directors are motivated to really make sure the bulk of Vanguard’s funds are up to snuff. Yes, they are motivated to come to meetings and give some thought (we shareholders hope) to the decision-making process at the Vanguard Group. But don’t forget, they’re being paid to do so—to the tune of between $207,600 and $250,000 each in 2013 alone.Vanguard’s longest- tenured director, Alfred Rankin, has been paid over $2.75 million since joining the board in 1993, and $1.9 million over the last decade. What I care about, though, is not so much the internal policies of the com- pany that is Vanguard, but the prod- uct—the funds that you and I invest in. And, like I said, nothing motivates a director to pay attention to a fund like having an ownership stake in it. Unfortunately, most don’t. — Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations , 1776

Consensus Breaks Down Quickly HELD BY 10 BOARD MEMBERS: Total Stock Market Index HELD BY 7 BOARD MEMBERS: Total International Index HELD BY 6 BOARD MEMBERS: Emerging Markets Index, Intermediate-Term Tax-Exempt, SmallCap Index HELD BY 4 BOARD MEMBERS: 500 Index, High Dividend Yield Index, PRIMECAP Core, Wellington HELD BY 3 BOARD MEMBERS: Capital Opportunity, Dividend Appreciation Index, Dividend Growth, Growth Index, Health Care, Limited-Term Tax-Exempt, Short-T Inv.-Grade, SmallCap Growth Index HELD BY 2 BOARD MEMBERS: Emerging Markets Select Stock, Explorer, Extended Market Index, Global Equity, High-Yield Tax-Exempt, International Growth, LargeCap Index, MidCap Growth, PRIMECAP, REIT Index, Short-T Bond Index, Short-Term Tax-Exempt, T-M Capital Appreciation, Total Bond Market, Wellesley Income, Windsor II, World Ex-U.S. Index, World Ex-U.S. SmallCap Index HELD BY 1 BOARD MEMBER: Capital Value, Convertible Securities, European Index, Financials Index, High Yield Corp., Int.-T Bond Index, Int.-T Inv.-Grade, International Explorer, International Value, MidCap Growth Index, PA Long-Term Tax-Ex., Selected Value, SmallCap Value Index, Target 2050, T-M SmallCap, Total World Stock Index, U.S. Growth, Value Index, Windsor

And Vanguard is only required to report these amounts annually, when they review and renew their fund prospectuses. Unfortunately, the legal team at Vanguard doesn’t always update this data with the same zeal as other information in the fund pro- spectuses, and I have, on several occasions, had to remind Vanguard that it was not fulfilling its regula- tory obligations. The fixes usually

It’s funny, but each year, as the months wind on, I hear repeated ques- tions from FFSA members, and not a few journalists as well, about just how Vanguard’s directors invest. One would think that in a company that hopes to educate its clientele, there’d be plenty of disclosure on the subject and expla- nations from the top brass about not only how they invest, but why they invest the way they do. Instead, silence. And simply compiling the data on Vanguard’s directors’ investments is difficult, as it is only disclosed in bits and pieces over many, many months. But based on the available information, through the end of 2013, Vanguard’s individual board members have each invested a minimum of anywhere from $110,002 to $2.1 million in Vanguard funds. Why do I say those are minimum numbers? First off, let me explain how imprecise the required disclo- sures are. Board members’ owner- ship is reported in just four catego- ries: $1–$10,000, $10,001–$50,000, $50,001–$100,000 and over $100,000.

Nothing motivates like having your own money on the line. Few Vanguard

directors are so motivated.

come after I’ve flagged the omissions. In calculating those “minimums,” I assumed that each director was at the low end of the stated range for every one of their holdings. For those with “over $100,000” invested, I assumed $100,001 as the minimum. Because of the varied timing of

12 • Fund Family Shareholder Association

www.adviseronline.com