How are Vanguard fund managers paid?

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Satin
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Joined: Mon Dec 16, 2013 2:26 am

How are Vanguard fund managers paid?

Post by Satin »

I like Vanguard's client-owned corporate structure. I'm curious about how Vanguard fund managers are compensated - tried a search but couldn't find any articles or Vanguard communications on this specific question.

Does anyone know if Vanguard fund managers are paid purely on base salary, or if they also receive additional compensation tied directly to fund performance?

For example:
- for index fund managers, perhaps based on minimizing tracking error or minimizing cost ratios
- for active fund managers, a carry based on fund profits? (if so, I would guess it would have to be a small one compared to the 'typical' active fund, considering Vanguard's low costs)
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JamesSFO
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Re: How are Vanguard fund managers paid?

Post by JamesSFO »

Interesting, posting to tag thread.
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jidina80
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Re: How are Vanguard fund managers paid?

Post by jidina80 »

I'm curious, too. Especially after Vanguard bond fund index managers invested too heavily (more than market weight) in Enron and WorldCom that caused the index fund to fare so poorly. That major [(mess up) --admin LadyGeek] cost investors millions. I'd like to learn how their compensation might have caused that or been affected by that, to learn for the future.


Quote from New York Times:
Market Place; Big Investors Maintain Faith In WorldCom Despite Inquiry
By PATRICK McGEEHAN with GERALDINE FABRIKANT
Published: March 14, 2002"But WorldCom's latest trouble has not shaken the faith of some of its biggest investors, including Charles Freeman, who manages the $15.3 billion Vanguard Windsor fund for the Vanguard Group. Mr. Freeman said he was not worried about WorldCom's accounting or the recent sale of about three million shares by a longtime director of the company."
http://www.nytimes.com/2002/03/14/busin ... quiry.html
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jidina80
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Re: How are Vanguard fund managers paid?

Post by jidina80 »

jidina80 wrote:I'm curious, too. Especially after Vanguard bond fund index managers invested too heavily (more than market weight) in Enron and WorldCom that caused the index fund to fare so poorly. That major [(mess up) --admin LadyGeek] cost investors millions. I'd like to learn how their compensation might have caused that or been affected by that, to learn for the future.


Quote from New York Times:
Market Place; Big Investors Maintain Faith In WorldCom Despite Inquiry
By PATRICK McGEEHAN with GERALDINE FABRIKANT
Published: March 14, 2002"But WorldCom's latest trouble has not shaken the faith of some of its biggest investors, including Charles Freeman, who manages the $15.3 billion Vanguard Windsor fund for the Vanguard Group. Mr. Freeman said he was not worried about WorldCom's accounting or the recent sale of about three million shares by a longtime director of the company."
http://www.nytimes.com/2002/03/14/busin ... quiry.html
The rest of the story: http://en.wikipedia.org/wiki/MCI_Inc.#A ... g_scandals
http://en.wikipedia.org/wiki/Enron#2001 ... ng_scandal
Louis Winthorpe III
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Re: How are Vanguard fund managers paid?

Post by Louis Winthorpe III »

jidina80 wrote:I'm curious, too. Especially after Vanguard bond fund index managers invested too heavily (more than market weight) in Enron and WorldCom that caused the index fund to fare so poorly. That major [(mess up) --admin LadyGeek] cost investors millions. I'd like to learn how their compensation might have caused that or been affected by that, to learn for the future.


Quote from New York Times:
Market Place; Big Investors Maintain Faith In WorldCom Despite Inquiry
By PATRICK McGEEHAN with GERALDINE FABRIKANT
Published: March 14, 2002"But WorldCom's latest trouble has not shaken the faith of some of its biggest investors, including Charles Freeman, who manages the $15.3 billion Vanguard Windsor fund for the Vanguard Group. Mr. Freeman said he was not worried about WorldCom's accounting or the recent sale of about three million shares by a longtime director of the company."
http://www.nytimes.com/2002/03/14/busin ... quiry.html
You've expressed concern over Vanguard's bond index funds buying more of Enron and Worldcom bonds than they should have, but you've linked an article about one of Vanguard's actively managed stock funds. Windsor is not a bond fund, and it's not an index fund. I think you're mistaken about any Vanguard index funds overweighting securities.
IlliniDave
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Re: How are Vanguard fund managers paid?

Post by IlliniDave »

Satin wrote:I like Vanguard's client-owned corporate structure. I'm curious about how Vanguard fund managers are compensated - tried a search but couldn't find any articles or Vanguard communications on this specific question.

Does anyone know if Vanguard fund managers are paid purely on base salary, or if they also receive additional compensation tied directly to fund performance?

For example:
- for index fund managers, perhaps based on minimizing tracking error or minimizing cost ratios
- for active fund managers, a carry based on fund profits? (if so, I would guess it would have to be a small one compared to the 'typical' active fund, considering Vanguard's low costs)
Just speculating ...

Many of VGs "active" funds are managed by contracted managers who work under negotiated fee structures that vary as a function of AUM, I believe. Basically what that means is as the AUM goes up, the marginal fee rate applied to the additional managed assets and paid to the manager tends to go down. How the managers (Primecap, Wellington, etc) compensate their employees is probably anyone's guess. Bogle talks about fee structures a little in his Clash of the Cultures Book, specifically about Wellington.

I'm not sure how they compensate their own employees for funds managed by Vanguard. In theory those funds don't make a profit as they are managed at cost, so there shouldn't be any sort of profit-sharing incentives. However it seems reasonable that there may be some performance incentives. One I could imagine is a fund management team receiving a bonus for reducing costs/lowering ER billed to shareholders, perhaps a modest fraction of the achieved savings.

It's an interesting question.
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hlfo718
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Re: How are Vanguard fund managers paid?

Post by hlfo718 »

The compensation is explained in the SAI but no actual amount is listed for each manager since is mainly a group thing. The description is on page B-40. The comp consists mainly of base, bonus, long term incentive comp and pension.
denovo
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Re: How are Vanguard fund managers paid?

Post by denovo »

One of my gripes with Vanguard is that we don't know how upper management is compensated, such as the CEO. I don't think they are looting the treasury so to speak given they have the most competitive fee structure , but I'd still like to know since I am a "shareholder" allegedly.
"Don't trust everything you read on the Internet"- Abraham Lincoln
Topic Author
Satin
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Joined: Mon Dec 16, 2013 2:26 am

Re: How are Vanguard fund managers paid?

Post by Satin »

hlfo718 - thanks for the tip about the Statement of Additional Information. That was very helpful.

Searching for "bonus", one of the SAIs for Vanguard's index funds says:
A portfolio manager’s bonus is determined by a number of factors. One factor is gross, pre-tax performance of the fund relative to expectations for how the fund should have performed, given the fund’s investment objective, policies, strategies, and limitations, and the market environment during the measurement period. This performance factor is not based on the value of assets held in the fund’s portfolio. For each Fund, the performance factor depends on how closely the portfolio manager tracks the Fund’s benchmark index over a one-year period.
Bonus paid annually. Plus additional incentives that are not fund-related, such as:
Additional factors include the portfolio manager’s contributions to the investment management functions within the sub-asset class, contributions to the development of other investment professionals and supporting staff, and overall contributions to strategic planning and decisions for the investment group.
This applies to Vanguard employees. Nice to see that compensation is influenced by how their index fund performs relative to their index.

And, IlliniDave was right, it is different for contracted managers. This SAI describes compensation for Wellington portfolio managers:
  • Wellington Management gets a fee based on AUM
  • Wellington portfolio managers get an incentive based on Wellington revenues (not performance-related), and for contributing to the firm's business operations
  • They may also be eligible for portfolio-based incentives. Not specified, just "Portfolio-based incentives across all accounts managed by an investment professional can, and typically do, represent a significant portion of an investment professional’s overall compensation;" noting this varies significantly.
On a side note, as I was reading the bonus information, I also found Vanguard's proxy voting guidelines in the SAI. Good reading.
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G-Money
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Re: How are Vanguard fund managers paid?

Post by G-Money »

Louis Winthorpe III wrote:
jidina80 wrote:I'm curious, too. Especially after Vanguard bond fund index managers invested too heavily (more than market weight) in Enron and WorldCom that caused the index fund to fare so poorly. That major [(mess up) --admin LadyGeek] cost investors millions. I'd like to learn how their compensation might have caused that or been affected by that, to learn for the future.


Quote from New York Times:
Market Place; Big Investors Maintain Faith In WorldCom Despite Inquiry
By PATRICK McGEEHAN with GERALDINE FABRIKANT
Published: March 14, 2002"But WorldCom's latest trouble has not shaken the faith of some of its biggest investors, including Charles Freeman, who manages the $15.3 billion Vanguard Windsor fund for the Vanguard Group. Mr. Freeman said he was not worried about WorldCom's accounting or the recent sale of about three million shares by a longtime director of the company."
http://www.nytimes.com/2002/03/14/busin ... quiry.html
You've expressed concern over Vanguard's bond index funds buying more of Enron and Worldcom bonds than they should have, but you've linked an article about one of Vanguard's actively managed stock funds. Windsor is not a bond fund, and it's not an index fund. I think you're mistaken about any Vanguard index funds overweighting securities.
jidina80 is not mistaken. I posted this in another thread earlier this week:

2002 total return:

Vanguard Total Bond Fund (VBMFX): 8.26%
Barclays U.S. Aggregate Index: 10.25%

Source: https://personal.vanguard.com/us/funds/ ... INT#tab=1a

That is tremendous underperformance for a broad market investment grade bond index fund.

Explanation from Vanguard for the underperformance:
Of course, the objective of an index fund is to track its target benchmark
closely. On this score, three of our four funds came up significantly short. The
Total Bond Market Index Fund--our oldest and biggest bond index fund--returned
8.3%, well below the 10.3% return of the Lehman Aggregate Bond Index. Our
Short-Term and Intermediate-Term Bond Index Funds also trailed their target
indexes by about 2 percentage points. The Long-Term Bond Index Fund's return was
within 0.4 percentage point of the target.

. . .

Although this extremely challenging market environment does not excuse our
funds' shortfalls to their indexes, it does help to explain them. For our funds,
the trouble began in June and intensified in July.

. . .

At that time, our funds had larger stakes than their indexes in several subsectors. In
particular, at a subsector level we had heavier weightings in bonds issued by
telecommunications and energy-trading companies. These groups were hit extremely
hard by the WorldCom bankruptcy, the Enron scandal, and accounting
irregularities at a number of other companies.
http://www.sec.gov/Archives/edgar/data/ ... inprog.txt
Don't assume I know what I'm talking about.
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