The Independent Adviser for Vanguard Investors
•
July 2014
•
15
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
IT STILL PAYS
to be a big dog at
Vanguard—a lot better than investing in
Vanguard’s flagship,
500 Index
.
Vanguard’s crew got the word as the
markets closed on the afternoon of June
12: The 2013 dividend for the Vanguard
Partnership Plan
was $146.52, matching
precisely the 12.0% increase Vanguard
employees saw for 2012.
Since Vanguard founder Jack Bogle
created the
Partnership Plan
in 1984,
the distributions from the plan have
risen 42-fold. Compare that to an
investment in flagship fund 500 Index,
which is up only half as much over the
same period.
And no, Vanguard employees, all
of whom own at least some shares
in the
Plan
, don’t have to buy their
shares—they are awarded shares for
multiple reasons, including, at times
as rewards for jobs well done. Of
course, in exchange, Vanguard’s crew
members are often paid lower salaries
than they might earn elsewhere. Plus,
dividends are paid out over five years,
so if you leave Vanguard during that
period, you lose whatever hasn’t yet
been paid to you.
The
Partnership Plan
is Vanguard’s
internal profit-sharing mechanism,
designed to reward all employees, from
top management to phone operators,
with profits the low-cost fund provider
generates each year. Based on a rolling
three-year period, and in large measure
focused on assets under management
rather than fund performance and fac-
toring in the “cost savings” compared to
industry averages, the
Partnership Plan
pays out many millions of dollars a year
to Vanguard’s top dogs, while limiting
most employees to a bonus that is cal-
culated using a tricky set of variables
related to their job “grade” and tenure.
Chairman Bill McNabb, named
President in early 2008 and CEO later
that same year, has seen assets under
management grow about 133% over the
five years since the end of 2008, while
the
Partnership Plan
’s dividend has
grown less than half as fast, up 60%.
But on a rolling three-year basis, the
growth in Vanguard’s Partnership Plan
dividend comes closer to matching the
firm’s asset growth.
Vanguard’s executives earn the bulk
of their compensation (90% or so) from
the
Partnership Plan
. While Vanguard
no longer discloses data that allows me
to estimate top executives’ compensation
(even though you and I are sharehold-
ers), I’ve done some calculations based
on disclosures made years ago about
Vanguard’s compensation to former
chairmen Jack Bogle and Jack Brennan.
If Jack Bogle were still Chairman
today, he’d be bringing down about
$15 million a year. It’s a good bet that
McNabb is taking home something
close to that. Now, before you think
that’s outrageous, consider BlackRock’s
CEO, Laurence “Larry” Fink, who
pulled down a reported $22.9 million
last year.
So yes, Vanguard is a very, very
profitable enterprise, despite its claims
of being something akin to a non-profit.
I don’t believe too many non-profits
pay their execs compensation in the
eight-figure range.
PROFITS
Partnership Plan Steady
Asset Growth
Well Outpaces the Dividend...
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-20%
-10%
0%
10%
20%
30%
40%
Partnership Dividend
Asset Growth
Dividend Growth Is Steady
UnderMcNabb
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Partnership Plan Dividend Growth
...But Over 3 Years, the Gap
Narrows a Bit
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0%
10%
20%
30%
40%
50%
60%
70%
80%
Three-year Dividend Growth
Three-year Asset Growth
stocks and bonds generated positive
returns at the same time. Contrary to pop-
ular belief, stocks and bonds both making
gains this year isn’t out of the norm. Dogs
and cats living together this is not.
Another key takeaway, which can
be filed as yet another reason not to
abandon bonds, is that bonds regu-
larly provided a nice offset when stocks
were dropping. In fact, over this nearly
30-year period, bonds notched positive
returns
every single time
stocks were
down over a 12-month stretch.
This is what makes bonds such an
attractive complement to stocks. Stocks
and bonds both have positive return
expectations over time, and it’s not
unusual for them to gain ground togeth-
er, but bonds have consistently been a
counterweight in balanced portfolios
when stocks declined.
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