Administration February 8, 2004

Vanguard Asks for Leeway In Index Fund Shifts

August 26, 2002 (PLANSPONSOR.com) - The Vanguard Group wants regulatory and shareholder approval for several initiatives including the ability to change fund benchmarks and reclassify certain funds as non-diversified.
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Vanguard took the first step in the process by filing a preliminary proxy statement with the US Securities and Exchange Commission (SEC).

Among its proposals is one giving the trustees of eight Vanguard equity index funds the right to change target benchmarks if they determined that would be the shareholders’ best interests. A new index would be required to track the same market segment as the fund’s existing index. The trustees of 19 Vanguard index funds already have that authority, according to Vanguard.

Vanguard said it wanted the added authority for the following of its index funds: 

  • Total Stock Market Index Fund
  • Extended Market Index Fund
  • SmallCap Index Fund
  • Growth Index Fund
  • Value Index Fund
  • Mid-Cap Index Fund
  • SmallCap Growth Index Fund
  • SmallCap Value Index Fund

“Bench” Warmer?

In its announcement, Vanguard also said it had gotten permission to use the next set of indexes being developed by Morgan Stanley Capital International (MSCI). MSCI is putting out a range of new US stock indexes, Vanguard said.

The new indexes are expected to include segmentation, style, and construction methods that Vanguard favors, the mutual fund company said.

While this agreement would enable Vanguard to use the new MSCI indexes, which are expected to be available in early 2003, it does not obligate the trustees of the Vanguard index funds to adopt them as benchmarks.

Vanguard said it also wanted to reclassify many of its index and index-oriented fund as being “non-diversified” under securities laws. According to the Vanguard statement, such a designation will allow index funds to continue replicating their target benchmarks even if the benchmark becomes dominated by a small number of stocks.

Vanguard will begin mailing proxy statements to shareholders on September 23, 2002. A special shareholder meeting is scheduled for December 3, 2002.  Shareholders can vote their proxy through Vanguard’s Web site or a toll-free phone line.

The use of investment indexes can be a sticky matter. Vanguard and S&P battled it out in court over Vanguard’s right to use S&P indexes with its new VIPERS products.

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