Beginning to evaluate the holdings of Vanguard Target Retirement Funds

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alex_686
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

Gort wrote: Tue Apr 13, 2021 8:18 pm Also, there are no more "Investor" share class index funds which Vanguard uses in their Target Retirement and Life Strategy Funds. I don't understand how Vanguard can determine the ER for the Target Retirement and Life Strategy Funds with funds that are no longer available?
Now it is my time to be confused. As of 3/31 the 2040 Target fund is either using the Investor shares or the more expensive retail version of the fund.

https://investor.vanguard.com/mutual-fu ... olio/vforx

Or maybe I am not confused. The industry in general - and Vanguard in particular - tend to resist clarity and transparency in their reporting.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
tibbitts
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by tibbitts »

alex_686 wrote: Tue Apr 13, 2021 9:26 pm
Gort wrote: Tue Apr 13, 2021 8:18 pm Also, there are no more "Investor" share class index funds which Vanguard uses in their Target Retirement and Life Strategy Funds. I don't understand how Vanguard can determine the ER for the Target Retirement and Life Strategy Funds with funds that are no longer available?
Now it is my time to be confused. As of 3/31 the 2040 Target fund is either using the Investor shares or the more expensive retail version of the fund.

https://investor.vanguard.com/mutual-fu ... olio/vforx

Or maybe I am not confused. The industry in general - and Vanguard in particular - tend to resist clarity and transparency in their reporting.
Maybe the lack of clarity is at least partly a function of caution in being certain to meet the myriad of regulation and compliance requirements.
000
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by 000 »

Gort wrote: Tue Apr 13, 2021 8:18 pm Also, there are no more "Investor" share class index funds which Vanguard uses in their Target Retirement and Life Strategy Funds. I don't understand how Vanguard can determine the ER for the Target Retirement and Life Strategy Funds with funds that are no longer available?
alex_686 wrote: Tue Apr 13, 2021 9:26 pm Now it is my time to be confused. As of 3/31 the 2040 Target fund is either using the Investor shares or the more expensive retail version of the fund.
Investor shares still exist. Vanguard won't let you buy them directly though. Other brokers still might. And of course they are used by the funds-of-funds.
alex_686
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

tibbitts wrote: Tue Apr 13, 2021 9:36 pm Maybe the lack of clarity is at least partly a function of caution in being certain to meet the myriad of regulation and compliance requirements.
Not in my opinion- and I have written this stuff.

And caution against what? There are areas where you want to draw as wide as a circle as possible just in case a black seam happens.

But we are talking about how much Vanguard is going to pay its portfolio manager. Yes, they could get into legal trouble if they lied about it. Or they might earn the ire of the shareholders if they were paid too much. But they should get into trouble if they did either.

No reason to throw a blanket over the issue.
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Silence Dogood
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Silence Dogood »

000 wrote: Tue Apr 13, 2021 9:44 pm
Gort wrote: Tue Apr 13, 2021 8:18 pm Also, there are no more "Investor" share class index funds which Vanguard uses in their Target Retirement and Life Strategy Funds. I don't understand how Vanguard can determine the ER for the Target Retirement and Life Strategy Funds with funds that are no longer available?
alex_686 wrote: Tue Apr 13, 2021 9:26 pm Now it is my time to be confused. As of 3/31 the 2040 Target fund is either using the Investor shares or the more expensive retail version of the fund.
Investor shares still exist. Vanguard won't let you buy them directly though. Other brokers still might. And of course they are used by the funds-of-funds.
000 is correct - the investor shares still exist.

For example, VTSMX:

https://investor.vanguard.com/mutual-fu ... file/VTSMX

(Closed to new investors.)
Silence Dogood
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Silence Dogood »

alex_686 wrote: Tue Apr 13, 2021 6:31 pm Note, Vanguard must charge a extra fee on top. If so they would be in major violation of SEC regulations. This used to be my day job. Vanguard can't sneakily grab money from one set of shareholders (the people who own other shares of the underlying fund) and give it to other shareholders (holders of the target date fund). Major no-no.
Aren't these two entities the same?

(As far as I'm aware, the Target Retirement/LifeStrategy fund-of-funds are the exclusive owners of the underlying funds...)
Last edited by Silence Dogood on Tue Apr 13, 2021 10:22 pm, edited 1 time in total.
-ryan-
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by -ryan- »

alex_686 wrote: Tue Apr 13, 2021 6:31 pm
-ryan- wrote: Tue Apr 13, 2021 6:02 pm Vanguard's target date funds use Investor shares, not Admiral shares, which is the only reason why the expense ratio is slightly higher than what you have estimated it should be. Vanguard is one of the only (if not the only) mutual fund company that does not charge an additional fee on top of the underlying fund fees in their target date funds.

As to why they don't use the lower cost admiral shares, it was originally related to the higher minimums required for Admiral shares. I assume they haven't switched their target date funds to the lower cost admiral shares because they are aware that they have a large number of investors with small balances and it wouldn't make sense financially for them to make the transition at this time, but that's just a guess.
This is false. Vanguard does charge an extra fee on top. It says so right on the expense calculation.

You have the wrong reason for the admiral shares verse the investor shares. There is nothing directly linking small balance investors in the target funds with the underlying shares.

The reason they use the more expensive investor shares is so they can burry the actual explicate fee being charged. Lots of funds do this. This lack of transparency is not a good thing.

Note, Vanguard must charge a extra fee on top. If so they would be in major violation of SEC regulations. This used to be my day job. Vanguard can't sneakily grab money from one set of shareholders (the people who own other shares of the underlying fund) and give it to other shareholders (holders of the target date fund). Major no-no.
I enjoy reading your posts, but you lost me a little on this one. I can't seem to find where it shows an extra fee on top so I must be looking in the wrong spot. Can you lead me in the right direction so I can see what you are looking at? You may also want to bring this to the attention of the people in charge of the bogleheads wiki because apparently they are spreading misinformation about Vanguard's funds of funds as well.
sreynard
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by sreynard »

tibbitts wrote: Tue Apr 13, 2021 9:24 pm
Flashes1 wrote: Tue Apr 13, 2021 2:56 pm Agreed. That's what I think anyone with a healthy amount of investing acumen should do (which probably covers +75% of Bogleheads).
I'm pretty sure the people who designed the Target funds have more investing acumen than +75% of Bogleheads.
The more I learn, the more I move to Vanguard’s Target funds. Not always the one for my retirement date though. But those, like the OP, with some special knowledge of the future, go ahead and knock yourself out. :beer
alex_686
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

-ryan- wrote: Tue Apr 13, 2021 10:22 pm I enjoy reading your posts, but you lost me a little on this one. I can't seem to find where it shows an extra fee on top so I must be looking in the wrong spot. Can you lead me in the right direction so I can see what you are looking at? You may also want to bring this to the attention of the people in charge of the bogleheads wiki because apparently they are spreading misinformation about Vanguard's funds of funds as well.
One of the things that irk me is that don’t disclose the fee.

The fund has expenses. No doubt about that.

They disclose that the expensive retail version of the underlying fund covers those expenses.

But they don’t disclose the amount.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Silence Dogood
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Silence Dogood »

-ryan- wrote: Tue Apr 13, 2021 10:22 pm I enjoy reading your posts, but you lost me a little on this one. I can't seem to find where it shows an extra fee on top so I must be looking in the wrong spot. Can you lead me in the right direction so I can see what you are looking at? You may also want to bring this to the attention of the people in charge of the bogleheads wiki because apparently they are spreading misinformation about Vanguard's funds of funds as well.
I think that alex_686 may be mistaken.
alex_686 wrote: Tue Apr 13, 2021 7:02 pm https://personal.vanguard.com/funds/rep ... 2210167722

Page 14

B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. The FSA provides that expenses otherwise allocable to Vanguard funds-of-funds may be reduced or eliminated to the extent of savings realized by the underlying Vanguard funds by virtue of being part of a fund-of-funds. Accordingly, all expenses for services provided by Vanguard to the fund and all other expenses incurred by the fund during the period ended September 30, 2020, were borne by the underlying Vanguard funds in which the fund invests. The fund’s trustees and officers are also trustees and officers, respectively, of the underlying Vanguard funds, as well as directors and employees, respectively, of Vanguard.
[Emphasis added.]

"...were borne by the underlying Vanguard funds in which the fund invests."
Bogleheads wiki wrote:The products are structured as funds-of-funds, charging only weighted averages of the expense ratios associated with the underlying holdings, which are primarily indexed.
alex_686
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

Silence Dogood wrote: Tue Apr 13, 2021 10:19 pm
alex_686 wrote: Tue Apr 13, 2021 6:31 pm Note, Vanguard must charge a extra fee on top. If so they would be in major violation of SEC regulations. This used to be my day job. Vanguard can't sneakily grab money from one set of shareholders (the people who own other shares of the underlying fund) and give it to other shareholders (holders of the target date fund). Major no-no.
Aren't these two entities the same?

(As far as I'm aware, the Target Retirement/LifeStrategy fund-of-funds are the exclusive owners of the underlying funds...)
Let me try again.

The Vanguard Total Stock Market Index Fund Investor Fund is a independent corporation.

It charges its shareholders a fee - a.k.a the expense ratio.

Those fees can only be used for the benefit of the shareholders. For example, you just can’t take money away from the Total Stock Market Fund and give it to another fund - like a target date fund. Even if it is in-kind items like accounting resources.

You have to treat all shareholders of the same class equally. You just can’t give a favored shareholder extra benefits - like doing the audits.

In short, just because target date fund owns TSMF does not allow TSMF to subsidize the target date fund by giving them fee money. Nor by giving them free in-kind payments.

That is why they have to buy the more expensive retail funds. It is how they smuggle the FoF’s operations expenses.
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Silence Dogood
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Silence Dogood »

alex_686 wrote: Tue Apr 13, 2021 11:04 pm You have to treat all shareholders of the same class equally.
But aren't "all" shareholders of this class the fund-of-funds themselves?

Besides, the math checks out:

VFFVX has a 0.15% expense ratio

Code: Select all

Fund:   Allocation:   Expense Ratio:
VTSMX     54.2%           0.14%
VGTSX     36.3%           0.17%
VTBIX      6.5%           0.09%
VTIBX*     3.0%           0.13%
0.542 * 0.14 + 0.363 * 0.17 + 0.065 * 0.09 + 0.03 * 0.13 = 0.14734

Page 4 of the Summary Prospectus:

Code: Select all

Annual Fund Operating Expenses
(Expenses that you pay each year as a percentage of the value of your investment)
Management Fees                        0.00%
12b-1 Distribution Fee                 None
Other Expenses                         0.00%
Acquired Fund Fees and Expenses        0.15%
Total Annual Fund Operating Expenses   0.15%
*In the process of being replaced by VTILX.
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hornet96
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

alex_686 wrote: Tue Apr 13, 2021 11:04 pm
Silence Dogood wrote: Tue Apr 13, 2021 10:19 pm
alex_686 wrote: Tue Apr 13, 2021 6:31 pm Note, Vanguard must charge a extra fee on top. If so they would be in major violation of SEC regulations. This used to be my day job. Vanguard can't sneakily grab money from one set of shareholders (the people who own other shares of the underlying fund) and give it to other shareholders (holders of the target date fund). Major no-no.
Aren't these two entities the same?

(As far as I'm aware, the Target Retirement/LifeStrategy fund-of-funds are the exclusive owners of the underlying funds...)
Let me try again.

The Vanguard Total Stock Market Index Fund Investor Fund is a independent corporation.

It charges its shareholders a fee - a.k.a the expense ratio.

Those fees can only be used for the benefit of the shareholders. For example, you just can’t take money away from the Total Stock Market Fund and give it to another fund - like a target date fund. Even if it is in-kind items like accounting resources.

You have to treat all shareholders of the same class equally. You just can’t give a favored shareholder extra benefits - like doing the audits.

In short, just because target date fund owns TSMF does not allow TSMF to subsidize the target date fund by giving them fee money. Nor by giving them free in-kind payments.

That is why they have to buy the more expensive retail funds. It is how they smuggle the FoF’s operations expenses.
Alex - I think you’re missing the point. I’m fairly certain that the only remaining shareholder of the underlying “investor” class funds are the TDF funds. Thus, the only ones left “paying” the management fee for the investor class shares are the TDF shareholders. The TDF disclosure is pretty clear in that all TDF expenses were borne by the underlying funds. Thus, all one has to do is look at the net expense ratio of the TDF fund to see how much the TDF fund is charging its own shareholders. They are hardly “smuggling” anything - all you have to do is look a the report to see how much it costs and where those costs come from.

FWIW, I write SEC disclosures myself, although not in the mutual fund industry. Perhaps Vanguard could be a little clearer in some of their related party disclosures. But I just don’t see the nefariousness here that you seem to.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Silence Dogood »

hornet96 wrote: Tue Apr 13, 2021 11:59 pm Alex - I think you’re missing the point. I’m fairly certain that the only remaining shareholder of the underlying “investor” class funds are the TDF funds. Thus, the only ones left “paying” the management fee for the investor class shares are the TDF shareholders. The TDF disclosure is pretty clear in that all TDF expenses were borne by the underlying funds. Thus, all one has to do is look at the net expense ratio of the TDF fund to see how much the TDF fund is charging its own shareholders. They are hardly “smuggling” anything - all you have to do is look a the report to see how much it costs and where those costs come from.
+1
Kookaburra
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Kookaburra »

000 wrote: Tue Apr 13, 2021 5:32 pm
Kookaburra wrote: Tue Apr 13, 2021 5:25 pm I thought valuations weren’t supposed to matter for us stay-the-course Bogleheads? If OPs original preference was for 15-25% International, should they change it now based on valuation differences?
In the end, valuations are the only thing that matter. Bogle himself acted on valuations, so....
No he didn’t.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by sycamore »

hornet96 wrote: Tue Apr 13, 2021 11:59 pm ...I’m fairly certain that the only remaining shareholder of the underlying “investor” class funds are the TDF funds.
Going off on a side track... the above seems very plausible but is there's a way to know for sure? I'm asking because I vaguely recall some 401k plans might still have access to the Investor class shares.

In the Statement of Additional Information (for Total Stock, at least), there's a section that starts with "As of March 31, 2020, the following owned of record 5% or more of the outstanding shares of each class (Other than ETF Shares):"

For the Total Stock Market Investor share class (VTSMX), it lists
VANGUARD LIFE STRATEGY GROWTH FUND VALLEY FORGE, PA 5.56%
VANGUARD TARGET RETIREMENT 2020 FUND VALLEY FORGE, PA 7.37%
VANGUARD TARGET RETIREMENT 2025 FUND VALLEY FORGE, PA 12.25%
VANGUARD TARGET RETIREMENT 2030 FUND VALLEY FORGE, PA 12.27%
VANGUARD TARGET RETIREMENT 2035 FUND VALLEY FORGE, PA 12.8%
VANGUARD TARGET RETIREMENT 2040 FUND VALLEY FORGE, PA 11.05%
VANGUARD TARGET RETIREMENT 2045 FUND VALLEY FORGE, PA 10.92%
VANGUARD TARGET RETIREMENT 2050 FUND VALLEY FORGE, PA 8.16%
So that's 80.38% of VTSMX held by some TDF & LifeStrategy funds. The remainder is held by shareholders who own less than 5% of outstanding shares. And it's slightly old information, dated over a year ago.

Looking at the 2/28/2021 net assets of the other LS funds not listed above, they hold about what LS Growth holds, I'm guessing another 7%. Likewise with the other TDF (2055, 2060, 2065) funds; about another 9%.

So that's over 95% in TDF and LS funds. If we had the 2021 SAIC it just might be 99 or 100%.

Presumably it's a similar story with the other Investor class funds (Total Bond, Total Intl Stock, etc.)
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Tom_T »

Flashes1 wrote: Tue Apr 13, 2021 2:54 pm International comprises approximately 41% of equities in the Target 2025 fund. That's out of my comfort zone.
That is the same weight as Total World Index -- which plenty of investors are perfectly comfortable with. It doesn't make the target fund bad. It just means you need to roll-your-own to match your comfort level.
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Flashes1
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Flashes1 »

rgs92 wrote: Tue Apr 13, 2021 6:35 pm I think the best approach to the OP's issues (and the questions about the expense ratios) would be to put most of your money in Vanguard Balanced Index (VBIAX, ER= .07%) and just enough in Vanguard International index (VTIAX, ER= .11%) to have just the right allocation of that you want.

This also avoids the OP's issues with a glide path into a large bond allocation. And it avoids the allocation into International Bonds.
So it it a simple and elegant 2-fund solution, and with some tweaking/re-balancing every 6 months or so, you can maintain it to your taste with a pretty low overall expense ratio.

And with the major portion in balanced index, you get continuous re-balancing in most of your portfolio, which is what target funds do (on the entire portfolio though).
The Balanced Index is an excellent idea as it would establish the automatic re-balancing of bonds/equities - you just need to be comfortable with the 40/60 bond/equity ratio. Quick observation: If I understand it correctly, the equity portion of this fund is essentially the U.S. TSM Index, and the bond portion is Total Bond Market Index - so no international holdings? The lower expense ratio is particularly attractive. Shame on Vanguard for not putting its Target Retirement Funds in the lower cost Admiral/Institutional class shares. If they're not big investors, I don't know who is?
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vineviz
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by vineviz »

Gort wrote: Tue Apr 13, 2021 8:18 pm Also, there are no more "Investor" share class index funds which Vanguard uses in their Target Retirement and Life Strategy Funds. I don't understand how Vanguard can determine the ER for the Target Retirement and Life Strategy Funds with funds that are no longer available?
The Investor share classes still exist, they simply are no longer available to retail investors. That share class is still used in Vanguard's fund-of-fund offerings.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by lostdog »

It sounds like you need a "Target Date Performance Chasing Fund".
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hornet96
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

Silence Dogood wrote: Tue Apr 13, 2021 11:55 pm
alex_686 wrote: Tue Apr 13, 2021 11:04 pm You have to treat all shareholders of the same class equally.
But aren't "all" shareholders of this class the fund-of-funds themselves?

Besides, the math checks out:

VFFVX has a 0.15% expense ratio

Code: Select all

Fund:   Allocation:   Expense Ratio:
VTSMX     54.2%           0.14%
VGTSX     36.3%           0.17%
VTBIX      6.5%           0.09%
VTIBX*     3.0%           0.13%
0.542 * 0.14 + 0.363 * 0.17 + 0.065 * 0.09 + 0.03 * 0.13 = 0.14734

Page 4 of the Summary Prospectus:

Code: Select all

Annual Fund Operating Expenses
(Expenses that you pay each year as a percentage of the value of your investment)
Management Fees                        0.00%
12b-1 Distribution Fee                 None
Other Expenses                         0.00%
Acquired Fund Fees and Expenses        0.15%
Total Annual Fund Operating Expenses   0.15%
*In the process of being replaced by VTILX.
Thanks for pulling this data; exactly what I was thinking. If I own this TDF, I'm paying 0.15% to own the fund, which is a weighted average of the underlying funds' expenses (not counting explicit or implicit trading costs).

It seems to me that Alex is accusing Vanguard of effectively hiding any TDF specific management fees within the "Acquired Fund Fees and Expenses" line item, since the investor class shares are slightly more expensive than the Admiral/etc. class shares. I would challenge that assertion, however, as if that were true, they would potentially be in violation of the disclosure requirement above, to break out the separate components of the fund's expenses, and would effectively be lying in the audited Note B to the financial statements, which states:

"The FSA provides that expenses otherwise allocable to Vanguard
funds-of-funds may be reduced or eliminated to the extent of savings realized by the underlying
Vanguard funds by virtue of being part of a fund-of-funds. Accordingly, all expenses for services
provided by Vanguard to the fund and all other expenses incurred by the fund during the period
ended September 30, 2020, were borne by the underlying Vanguard funds
in which the fund
invests."

Now that I think about it - I recall a couple of years back when Vanguard was first launching these FSAs and shareholders of most of their funds had to approve the change. The FSA is effectively a cost-sharing arrangement between related parties that have co-mingled operations.

As I noted before, perhaps their Related Party disclosures could be more robust here. If Alex's main contention is that we can't really quantify what the "cost savings realized by the underlying funds" were that reduced or eliminated the TDF's direct expenses, then I could see that point. Then again, I'm reminded of Denovo's great car buying thread - isn't the main thing I really care about the "out-the-door" price of 0.15% when comparing against other available options? :wink:
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Flashes1
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Flashes1 »

lostdog wrote: Wed Apr 14, 2021 7:35 am It sounds like you need a "Target Date Performance Chasing Fund".
You just gave me a great idea....how about giving investors the ability to construct their own Target Funds where they can select their allocations to each category? Example: I go to Vanguard.com and say I want 50% to TSM, 15% to Extended Market, 15% to International Index, and 30% to Total Bond Index.

This idea is my ticket to great wealth! I just need to figure out a way to patent it! :D
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by livesoft »

Flashes1 wrote: Wed Apr 14, 2021 9:05 amThis idea is my ticket to great wealth! I just need to figure out a way to patent it! :D
This already exists, but not at Vanguard. You need to switch your money to another firm.
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Flashes1
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Flashes1 »

livesoft wrote: Wed Apr 14, 2021 9:10 am
Flashes1 wrote: Wed Apr 14, 2021 9:05 amThis idea is my ticket to great wealth! I just need to figure out a way to patent it! :D
This already exists, but not at Vanguard. You need to switch your money to another firm.
Interesting. I did not know that. I think there would be value in having just one fund that has your own Allocation %'s, and the mutual fund company could restrict the number of times you could change the allocations per annum to mitigate their expenses (say 1x year).

I can create my own Target Retirement Fund via 4-5 different funds; however, I like the idea of having them all in just one fund.
alex_686
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

You know, it is on days like this when I wish I had that excellent white paper about the historical evolution of mutual fund controls. 100 pages starting with the fund industry over 100 years ago. Sigh.

To summarize my point, this fee disclosure is confusing and lacks transparency. The are knowable specific expenses at the fund level which Vanguard is obscuring. This method is legal but undesirable.
hornet96 wrote: Wed Apr 14, 2021 8:30 am Thanks for pulling this data; exactly what I was thinking. If I own this TDF, I'm paying 0.15% to own the fund, which is a weighted average of the underlying funds' expenses (not counting explicit or implicit trading costs).

It seems to me that Alex is accusing Vanguard of effectively hiding any TDF specific management fees within the "Acquired Fund Fees and Expenses" line item, since the investor class shares are slightly more expensive than the Admiral/etc. class shares. I would challenge that assertion, however, as if that were true, they would potentially be in violation of the disclosure requirement above, to break out the separate components of the fund's expenses, and would effectively be lying in the audited Note B to the financial statements, which states:
Yes, I am accusing Vanguard of hiding the specific costs for running the fund. No, it is not illegal. Using vague rebate language is a valid dodge. Other FoF do break it out.
hornet96 wrote: Wed Apr 14, 2021 8:30 am Now that I think about it - I recall a couple of years back when Vanguard was first launching these FSAs and shareholders of most of their funds had to approve the change. The FSA is effectively a cost-sharing arrangement between related parties that have co-mingled operations.
This is nonsense. At best a copout. All funds within a fund family share costs across the family. These shaded costs are always broken out across al funds and have done so for decades. It is a SEC mandate from I don't know when. Vanguard breaks out the shared costs for every other fund on these same exact expenses. There is no reason why Vanguard can't break out the costs for the FoFs.
hornet96 wrote: Wed Apr 14, 2021 8:30 am As I noted before, perhaps their Related Party disclosures could be more robust here. If Alex's main contention is that we can't really quantify what the "cost savings realized by the underlying funds" were that reduced or eliminated the TDF's direct expenses, then I could see that point. Then again, I'm reminded of Denovo's great car buying thread - isn't the main thing I really care about the "out-the-door" price of 0.15% when comparing against other available options? :wink:
2 things here. Both hinge on the fact that we don't know what the costs are to run the fund.

First, I am not willing to make the assumption that there are "cost savings realized by the underlying funds". It may be that the target date funds are running at a loss. Thus the Admiral and ETF class shareholders would be subsidizing the target date funds via the investor class shareholders in the TSMF. Or maybe the target date funds are making a ton of money and are subsidizing TSMF.

The point is that we don't know. Is this criminal or violates any regulations? No. Is it sloppy second rate work? Yes. Vanguard scores high in many areas. However, when it comes to transparency and responsiveness to shareholders Vanguard scores below average.

Second, should we care about transparency and responsiveness if the cost is right? Well, I would argue yes. Should we have cared about the sloppy accounting procedures at Enron and MCI WorldCom? After all, they delivered the right numbers. Doesn't this argument fall into the "Slippery Slope Fallacy". eh. A car is a one time purchase. Most people are expecting to have a long relationship with their fund.

Accounting frauds tend to start by neglecting the small things. Great organizations shift to mediocre organizations by letting the small things slide.

Lastly, while this is not the biggest thing in the world, we should always encourage of fund providers to strive for the highest marks in all areas.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by vineviz »

alex_686 wrote: Wed Apr 14, 2021 9:32 am
hornet96 wrote: Wed Apr 14, 2021 8:30 am It seems to me that Alex is accusing Vanguard of effectively hiding any TDF specific management fees within the "Acquired Fund Fees and Expenses" line item, since the investor class shares are slightly more expensive than the Admiral/etc. class shares. I would challenge that assertion, however, as if that were true, they would potentially be in violation of the disclosure requirement above, to break out the separate components of the fund's expenses, and would effectively be lying in the audited Note B to the financial statements, which states:
Yes, I am accusing Vanguard of hiding the specific costs for running the fund. No, it is not illegal. Using vague rebate language is a valid dodge. Other FoF do break it out.
I just want to chime in to reinforce the accuracy of what alex_686 is saying here. Intentionally or not, Vanguard is effectively burying the cost of managing their Target Retirement and LifeStrategy funds within the cost of the underlying funds, and the amount isn't small. In fact, it's probably 5 or 6 bps of expenses being reported on the financial statements of the underlying funds which are actually being incurred at the fund-of-fund level.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

alex_686 wrote: Wed Apr 14, 2021 9:32 am
Is it sloppy second rate work? Yes. Vanguard scores high in many areas. However, when it comes to transparency and responsiveness to shareholders Vanguard scores below average.

Second, should we care about transparency and responsiveness if the cost is right? Well, I would argue yes. Should we have cared about the sloppy accounting procedures at Enron and MCI WorldCom? After all, they delivered the right numbers. Doesn't this argument fall into the "Slippery Slope Fallacy". eh. A car is a one time purchase. Most people are expecting to have a long relationship with their fund.

Accounting frauds tend to start by neglecting the small things. Great organizations shift to mediocre organizations by letting the small things slide.

Lastly, while this is not the biggest thing in the world, we should always encourage of fund providers to strive for the highest marks in all areas.
"Accounting Frauds," "Sloppy Accounting Procedures," "Neglecting the small things." Wow, those are some mighty big accusations without providing any actual evidence, for a disclosure that you don't particularly seem to like.

So do you believe that PwC is incompetent as the funds' auditor? How do you *know* that VG's disclosure and presentation is in fact "sloppy" and at all resemble something like the accounting frauds at Enron and WC? (And no, actually neither of those companies "delivered the right numbers" as the whole world knows - fraud is fraud. Are you accusing VG and/or PwC of fraud?). Is it not possible that the 0.15% reported fee is in fact the "right" total number, but you are simply complaining that you'd like to see the detailed account reconciliations that tie to their SAP general ledger reports? Financial statement figures are aggregated all the time, in order for the financial reporting information to be comprehensible. Do you really want a set of financial statements to just include the entities' entire detailed Trial Balance to sift through? There are valid reasons for the accounting/presentation rules that dictate presentation requirements. The auditor's opinion includes opining on the accuracy and fairness of such presentation matters.

Talk about conflating two entirely different issues.

FWIW, I know a thing or two about PwC and auditing; particularly in the post-SOX world. If you have evidence that VG is committing fraud via these disclosures, why aren't you reporting it to the SEC?
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

vineviz wrote: Wed Apr 14, 2021 10:16 am
alex_686 wrote: Wed Apr 14, 2021 9:32 am
hornet96 wrote: Wed Apr 14, 2021 8:30 am It seems to me that Alex is accusing Vanguard of effectively hiding any TDF specific management fees within the "Acquired Fund Fees and Expenses" line item, since the investor class shares are slightly more expensive than the Admiral/etc. class shares. I would challenge that assertion, however, as if that were true, they would potentially be in violation of the disclosure requirement above, to break out the separate components of the fund's expenses, and would effectively be lying in the audited Note B to the financial statements, which states:
Yes, I am accusing Vanguard of hiding the specific costs for running the fund. No, it is not illegal. Using vague rebate language is a valid dodge. Other FoF do break it out.
I just want to chime in to reinforce the accuracy of what alex_686 is saying here. Intentionally or not, Vanguard is effectively burying the cost of managing their Target Retirement and LifeStrategy funds within the cost of the underlying funds, and the amount isn't small. In fact, it's probably 5 or 6 bps of expenses being reported on the financial statements of the underlying funds which are actually being incurred at the fund-of-fund level.
I'm not necessarily arguing with that point. The TDF's fees are subsumed by the underlying funds. I get that. But Alex seems to expect that Vanguard should meet a reporting & disclosure obligation that doesn't exist, and by not doing so, they are "sloppy" and perhaps on the cusp of committing fraud. That is pure nonsense.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

hornet96 wrote: Wed Apr 14, 2021 10:22 am
alex_686 wrote: Wed Apr 14, 2021 9:32 am Is it sloppy second rate work? Yes. Vanguard scores high in many areas. However, when it comes to transparency and responsiveness to shareholders Vanguard scores below average.
"Accounting Frauds," "Sloppy Accounting Procedures," "Neglecting the small things." Wow, those are some mighty big accusations without providing any actual evidence, for a disclosure that you don't particularly seem to like.

So do you believe that PwC is incompetent as the funds' auditor? How do you *know* that VG's disclosure and presentation is in fact "sloppy" and at all resemble something like the accounting frauds at Enron and WC? (And no, actually neither of those companies "delivered the right numbers" as the whole world knows - fraud is fraud. Are you accusing VG and/or PwC of fraud?). Is it not possible that the 0.15% reported fee is in fact the "right" total number, but you are simply complaining that you'd like to see the detailed account reconciliations that tie to their SAP general ledger reports? Financial statement figures are aggregated all the time, in order for the financial reporting information to be comprehensible. Do you really want a set of financial statements to just include the entities' entire detailed Trial Balance to sift through? There are valid reasons for the accounting/presentation rules that dictate presentation requirements. The auditor's opinion includes opining on the accuracy and fairness of such presentation matters.

Talk about conflating two entirely different issues.

FWIW, I know a thing or two about PwC and auditing; particularly in the post-SOX world. If you have evidence that VG is committing fraud via these disclosures, why aren't you reporting it to the SEC?
Oddly, you failed to quote the first thing that I said:
alex_686 wrote: Wed Apr 14, 2021 9:32 am To summarize my point, this fee disclosure is confusing and lacks transparency. The are knowable specific expenses at the fund level which Vanguard is obscuring. This method is legal but undesirable.
Look, I am not saying that Vanguard is evil, committing fraud, or will blow up tomorrow. But their reporting and transparency is a weak spot.

Turning in C level work does not mean you have failed the class. Just that you turned in sloppy second rate work. I mean, if your kids turned in C level grades would you be happy? I mean, they didn't cheat nor the did they fail. Would you jump up and down in excitement and and heap praise on them? I would hope not.

As for Enron or MCI WorldCom, take a look at their history 10 years before they blew up. Or if not Enron then take a look at other world leaders who have fallen on hard times. Rot takes years to work its way in.
hornet96 wrote: Wed Apr 14, 2021 10:25 am I'm not necessarily arguing with that point. The TDF's fees are subsumed by the underlying funds. I get that. But Alex seems to expect that Vanguard should meet a reporting & disclosure obligation that doesn't exist, and by not doing so, they are "sloppy" and perhaps on the cusp of committing fraud. That is pure nonsense.
No, to repeat, they are meeting the minimal standards. Other funds break out the costs. This is a better, clearer, more transparent method.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by fwellimort »

Flashes1 wrote: Wed Apr 14, 2021 9:05 am
lostdog wrote: Wed Apr 14, 2021 7:35 am It sounds like you need a "Target Date Performance Chasing Fund".
You just gave me a great idea....how about giving investors the ability to construct their own Target Funds where they can select their allocations to each category? Example: I go to Vanguard.com and say I want 50% to TSM, 15% to Extended Market, 15% to International Index, and 30% to Total Bond Index.

This idea is my ticket to great wealth! I just need to figure out a way to patent it! :D
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I am assuming you are doing all this in a tax advantaged account.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by loghound »

Horton wrote: Tue Apr 13, 2021 2:45 pm The holdings of the TDFs are transparent, all you have to do is look. As to the specific objections, you be right or wrong. That said, I’d bet you a cup of coffee that the 10-year performance of the Vanguard TDF will be better than whatever you pick on your own. (In full transparency, I compared my DIY performance for the last 11 years and I was slightly below the Vanguard TDF performance for my estimated retirement year.)
I was talking with my brother just the other day on this topic... He is a big user of TDF funds because of their simplicity and rationale behaviour. I mentioned how I was using a robo investor for some of my money for a similar effect but I (thought?) that the robo investor was better because I could more easily tune it.

Anyway I ended up looking at my robo investor vs. the Vanguard funds and I was surprised at what I found. The Vanguard funds did, in general, better. I chose the vanguard 2035 and 2045 because I wanted something that was light on bonds (because my robo investor was tuned to be equities heavy)

Of course if you look at much closer end funds (like the Vanguard 2025 or Vanguard 2030) then the equities heavy robo investor does better but not that much (especially considering the 2025 is almost 40% bonds!)

I was sort of turned off a few years ago to the TDF's but I'm beginning to reconsider them....
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

Flashes1 wrote: Tue Apr 13, 2021 3:40 pm As a U.S. person I'm comfortable with Intl. comprising 15-25% exposure with the belief my U.S. holdings (primarily the S&P companies) provide sufficient additional international exposure. I'm opening up a can worms, but I do believe in American exceptionalism primarily with IP protection, court system, strong influx of the world's best and brightest wanting to immigrate here and create businesses - the last one should particularly not be underestimated, IMHO - just compare the new companies created in the U.S. in the last 30 years to what's been created in Japan, UK, and Germany. In my line of work, I see all the foreign banks aggressively expanding into the U.S. for these very reasons. I don't see BoA aggressively investing their capital in Japan, Germany, and UK - but I see ALL of the international banks/equity sponsors aggressively investing in the U.S. Capital is what turns the lights on our houses every morning.
So, after posting lots of stuff which is tangent to this topic, I want to bring it back. Basically, your arguments are not showing up in the numbers. P&G does about as well as Nestle or Unilever. Boeing about as well as Airbus. Go company by company and the location of the headquarters is not a primary factor.

I have 2 arguments against this.

First, I would argue that the legal protections and market structures are comparable between US and DM countries. I think we are going to have to agree to disagree on that.

Second, and you hint at this, there is a low linkage between the US factors and the US stock market. Just because the US economy is exception does not follow that the US stock market will be. I would argue that the exceptionalism is showing up in wages, private companies, and start ups, not large public multinationals. You will invest in US companies that invest overseas but not DM companies that invest in the US? For example you cite US immigration policies. Lots of foreign companies set up R&D shops in the US to gain access to that talent.

I get what you are saying and agree on some points. But I don't think it translates strongly to passive index investing.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by vineviz »

hornet96 wrote: Wed Apr 14, 2021 10:25 am But Alex seems to expect that Vanguard should meet a reporting & disclosure obligation that doesn't exist, and by not doing so, they are "sloppy" and perhaps on the cusp of committing fraud. That is pure nonsense.
Personally, I don't think it's asking too much of Vanguard to suggest that they can (and should) do more than the bare minimum required by the law.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

alex_686 wrote: Wed Apr 14, 2021 10:33 am
Oddly, you failed to quote the first thing that I said:
alex_686 wrote: Wed Apr 14, 2021 9:32 am To summarize my point, this fee disclosure is confusing and lacks transparency. The are knowable specific expenses at the fund level which Vanguard is obscuring. This method is legal but undesirable.
That is all that needed to be said to make your point. However, you then take it up several notches by venturing into "sloppy accounting" and "fraud."
alex_686 wrote: Look, I am not saying that Vanguard is evil, committing fraud, or will blow up tomorrow. But their reporting and transparency is a weak spot.

Turning in C level work does not mean you have failed the class. Just that you turned in sloppy second rate work. I mean, if your kids turned in C level grades would you be happy? I mean, they didn't cheat nor the did they fail. Would you jump up and down in excitement and and heap praise on them? I would hope not.
"Turning in C level work." "Sloppy second rate work."

Here we go again - how do you *know* they are turning in "sloppy C-level second-rate work?" That is my problem with these kinds of statements (accusations). You "believe" it is C-level work (a grading construct of some sort in your own mind). You "believe" it is indicative of "sloppy accounting" of some sort. Truly "sloppy accounting" means that there is a significant risk of a material error/misstatement in the figures being reported. Which were audited by a legitimate Big-4 accounting firm. Do you not understand that the amounts reported could actually be A-level, top-notch accounting figures tested and tied out to the penny, that are simply not broken out in the disclosure in the kind of detail you would *like* to see? Not liking a particular approach towards a disclosure is hardly indicative of anything "sloppy" or "second-rate work."
alex_686 wrote: Wed Apr 14, 2021 9:32 am As for Enron or MCI WorldCom, take a look at their history 10 years before they blew up. Or if not Enron then take a look at other world leaders who have fallen on hard times. Rot takes years to work its way in.
I have studied these cases way more than you'll ever know. Do you think that PwC is colluding with Vanguard to purposefully and fraudulently misstate the TDF funds' expenses, and earning some sort of lucrative advisory fee for their fraudulent advice?

It's clear that you have some kind of beef with Vanguard. I don't really care. But you need to realize that your statements about "sloppy accounting work," "rot," and "neglect" are nothing more than speculation without evidence.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

vineviz wrote: Wed Apr 14, 2021 10:56 am
hornet96 wrote: Wed Apr 14, 2021 10:25 am But Alex seems to expect that Vanguard should meet a reporting & disclosure obligation that doesn't exist, and by not doing so, they are "sloppy" and perhaps on the cusp of committing fraud. That is pure nonsense.
Personally, I don't think it's asking too much of Vanguard to suggest that they can (and should) do more than the bare minimum required by the law.
That's fine, but then why do we have to venture into "sloppy accounting," "potential fraud," and "rot setting in" when we don't see the kind of detail that we'd like to see in a disclosure?
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by HawkeyePierce »

Behaviorally, most investors are better off just plowing all their money into an inexpensive target date index fund than trying to DIY their portfolio.

https://www.morningstar.com/articles/75 ... er-results

Honestly, despite all my tinkering with my own portfolio, I too would probably be better off just dumping everything into a target date or LifeStrategy fund. I think few of us are exceptions to that.

Whenever a friend asks me for investing advice, I tell them to pick a Vanguard TDF and then go do something fun with all the time they've saved.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

hornet96 wrote: Wed Apr 14, 2021 11:02 am Here we go again - how do you *know* they are turning in "sloppy C-level second-rate work?" That is my problem with these kinds of statements (accusations). You "believe" it is C-level work (a grading construct of some sort in your own mind). You "believe" it is indicative of "sloppy accounting" of some sort. Truly "sloppy accounting" means that there is a significant risk of a material error/misstatement in the figures being reported.
This is my professional opinion. So yes, this is my belief. I did this stuff for 10 years. Part of this was getting to know the standards. Another part was to pull the reporting for our competitors for comparisons. Other companies have higher, more exacting standards that allow you to drill deeper.

If you think sloppy is overly pejorative what would your adjective be for somebody who does the minimal effort to meet the mark? The lowest level of transparency?

So here is a example. My old fund used to list all of its individual holdings down to the penny. The individual holdings sum to the assets held at the balance sheet to the penny. Everything tied out to the penny. Everything was perfect. Until one year a guy in Florida found a error. By summing up the individual holdings (and there were 1000s) he found that they did not tie out. What happened was that one holding had a name that was exactly the right size so we didn't need a End Of Line character at the end. That caused the next holding to fall off of the statement of investments. Note, this passed the accounting review, the 2nd accounting review, the accounting manager review, the internal auditor, and the external auditor - who may have been PwC at the time.

Vanguard does not report to the penny - it reports to the nearest $1,000. So something like this could slip by.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by climber2020 »

Not sure if this has been brought up yet, but I remember reading somewhere that the Target Date funds have gradually ramped up international equity exposure over the years. I think originally international was only 20% of equities and it has gone up every few years.

Is this because the US market has shrunk relative to the rest of the world? Going from 20 to 40% seems like a large change.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by donaldfair71 »

vineviz wrote: Tue Apr 13, 2021 2:50 pm
Flashes1 wrote: Tue Apr 13, 2021 2:15 pm * Just a fair warning to other Bogleheads who might have blindly signed-up for Vanguard Target Funds - the ignorant get fleeced!
It seems to me that Bogleheads who signed up for a target date fund got a much better portfolio than if they randomly followed advice from people on the forum.
Yessir.

At most, to get "frisky", use the Merriman 2 fund. But I would think that the Target Date is the apex of simplicity with effectiveness.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by donaldfair71 »

climber2020 wrote: Wed Apr 14, 2021 12:30 pm Not sure if this has been brought up yet, but I remember reading somewhere that the Target Date funds have gradually ramped up international equity exposure over the years. I think originally international was only 20% of equities and it has gone up every few years.

Is this because the US market has shrunk relative to the rest of the world? Going from 20 to 40% seems like a large change.
I believe the premise is:

You are getting Vanguard active management at a tiny fraction of typical active management in a TDF.
That active management believes that international has higher expected returns than it did previously when the allocation was lower.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

climber2020 wrote: Wed Apr 14, 2021 12:30 pm Not sure if this has been brought up yet, but I remember reading somewhere that the Target Date funds have gradually ramped up international equity exposure over the years. I think originally international was only 20% of equities and it has gone up every few years.

Is this because the US market has shrunk relative to the rest of the world? Going from 20 to 40% seems like a large change.
It is not because the US market has shrunk. Rather it is a change in attitude and market structure. The question is no longer "why international", but "why not international".

International markets have become more integrated with US markets. i.e. Accounting standards and market regulations have harmonized and have become roughly equivalent. Trading and the back office stuff have become cheaper. etc. Companies have become more international.
donaldfair71 wrote: Wed Apr 14, 2021 12:39 pm That active management believes that international has higher expected returns than it did previously when the allocation was lower.
I don't see this. When markets are not integrated or are inefficient that is a argument for active management. But the trend has been going in the opposite direction. Higher integration and higher market efficiency. This argues for passive investing. i.e., moving to the market weight.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by JD2775 »

HawkeyePierce wrote: Wed Apr 14, 2021 11:15 am Behaviorally, most investors are better off just plowing all their money into an inexpensive target date index fund than trying to DIY their portfolio.

https://www.morningstar.com/articles/75 ... er-results

Honestly, despite all my tinkering with my own portfolio, I too would probably be better off just dumping everything into a target date or LifeStrategy fund. I think few of us are exceptions to that.

Whenever a friend asks me for investing advice, I tell them to pick a Vanguard TDF and then go do something fun with all the time they've saved.
Agreed. The only reason I don't do a TDF in my 401k with Merrill is because its significantly more expensive than if I just piece together 3 of their low cost index funds myself.
I don't want them in my Roth or Taxable account as I would prefer to keep all bonds in my 401k, but that's another story entirely.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

alex_686 wrote: Wed Apr 14, 2021 12:03 pm
If you think sloppy is overly pejorative what would your adjective be for somebody who does the minimal effort to meet the mark? The lowest level of transparency?
Extremely efficient and productive. You said it yourself - "minimal effort to meet the mark." Meeting the mark doesn't automatically indicate a likelihood that something sloppy or nefarious is going on. If you don't think the mark is high enough, that is a reflection on the mark, rather than on the company meeting said mark. Accurately and timely meeting the minimum compliance obligations is generally viewed as a reasonable and efficient use of a corporation's resources. Going above and beyond for a compliance activity because it "feels good" is generally viewed as wasteful spending and an inefficient use of a firm's resources, which is the very antithesis of what Vanguard is all about.
alex_686 wrote: Wed Apr 14, 2021 12:03 pm Vanguard does not report to the penny - it reports to the nearest $1,000. So something like this could slip by.


No one said that they did. Just because they don't present amounts down to the penny in these public reports, it doesn't mean that their underlying accounting records don't keep track of every penny and that the reports used to support the financial statements aren't regularly reviewed for accuracy, both in terms of the exact amounts and the rounded amounts used in public reports. I'm not saying they, or their auditors, are perfect and that no errors could ever happen. But errors aren't any more or less likely to happen just because of rounding choices made in an external report.

I'm also not saying it wouldn't be interesting to see a more detailed breakout of fund expenses. Maybe 0.01% or 0.02% of the 0.15% really relates to the operations of the particular TDF in question? Maybe it's a bit more, maybe less, I have no idea. That is a legitimate point to raise, although I'd argue it's immaterial from a decision making standpoint. Would knowing the exact breakdown of the 0.15% provide me with any additional actionable information? I'm fairly certain it can't be more than 0.15% in the example given. Should I really care if the breakout shows that actually, 0.05% is the cost of operating my TDF, and 0.10% is the cost of operating the underlying funds? Would you care if I gave you a dime and a nickel, versus three nickels? By not providing me with more granular information, it automatically means they are likely being "sloppy" and potentially "fraudulent?" Do you believe it's really 1% or something, and they are somehow hiding a substantial amount of costs to operate the TDF from the world? If that were true, at some point those hidden costs would show up as a substantial tracking error, somewhere.

Speculating on sloppiness and potential fraud, simply because a firm is meeting "only" its minimum reporting obligations while you think you're entitled to additional detailed disclosure without incurring additional costs, is hyperbolic and distracting from any legitimate concerns about transparency, or whether the disclosure rules as promulgated by the SEC should be updated. That kind of unsupported hyperbole does more harm than good, and is the kind of thing that leads to the OP's perception that he's somehow being "fleeced" by using a Vanguard TDF.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by vineviz »

hornet96 wrote: Wed Apr 14, 2021 1:41 pm
alex_686 wrote: Wed Apr 14, 2021 12:03 pm
If you think sloppy is overly pejorative what would your adjective be for somebody who does the minimal effort to meet the mark? The lowest level of transparency?
Extremely efficient and productive. You said it yourself - "minimal effort to meet the mark." Meeting the mark doesn't automatically indicate a likelihood that something sloppy or nefarious is going on. If you don't think the mark is high enough, that is a reflection on the mark, rather than on the company meeting said mark. Accurately and timely meeting the minimum compliance obligations is generally viewed as a reasonable and efficient use of a corporation's resources. Going above and beyond for a compliance activity because it "feels good" is generally viewed as wasteful spending and an inefficient use of a firm's resources, which is the very antithesis of what Vanguard is all about.
In this case, however, it's important to note two things:

One, Vanguard is gaining no efficiencies or cost savings by reporting fees in the way they do. All the accounting has to happen regardless of what gets publicly reported: there can be no explanation for Vanguard's opaque public reporting other than "they want to do it this way".

Two, Vanguard is virtually alone within the industry in this regard. The transparency provided by virtually every other fund company allows us to fully evaluate whether they are accounting for expenses in a manner that is fair and reasonable. Vanguard has chosen to report their financial data in a way that makes it impossible for customers to see what is going on, and there's no legitimate reason for them to do so. Regardless of whether the actual reason has an element of nefariousness or simply reflects too much laziness to change, it's not a good look for a firm that touts its mutual ownership structure.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

vineviz wrote: Wed Apr 14, 2021 1:53 pm
hornet96 wrote: Wed Apr 14, 2021 1:41 pm
alex_686 wrote: Wed Apr 14, 2021 12:03 pm
If you think sloppy is overly pejorative what would your adjective be for somebody who does the minimal effort to meet the mark? The lowest level of transparency?
Extremely efficient and productive. You said it yourself - "minimal effort to meet the mark." Meeting the mark doesn't automatically indicate a likelihood that something sloppy or nefarious is going on. If you don't think the mark is high enough, that is a reflection on the mark, rather than on the company meeting said mark. Accurately and timely meeting the minimum compliance obligations is generally viewed as a reasonable and efficient use of a corporation's resources. Going above and beyond for a compliance activity because it "feels good" is generally viewed as wasteful spending and an inefficient use of a firm's resources, which is the very antithesis of what Vanguard is all about.
In this case, however, it's important to note two things:

One, Vanguard is gaining no efficiencies or cost savings by reporting fees in the way they do. All the accounting has to happen regardless of what gets publicly reported: there can be no explanation for Vanguard's opaque public reporting other than "they want to do it this way".

Two, Vanguard is virtually alone within the industry in this regard. The transparency provided by virtually every other fund company allows us to fully evaluate whether they are accounting for expenses in a manner that is fair and reasonable. Vanguard has chosen to report their financial data in a way that makes it impossible for customers to see what is going on, and there's no legitimate reason for them to do so. Regardless of whether the actual reason has an element of nefariousness or simply reflects too much laziness to change, it's not a good look for a firm that touts its mutual ownership structure.
Ok, then I'll ask you: If I know that another fund family's TDF costs 0.10% to operate, plus 0.10% in acquired fund fees (for a total expense ratio of 0.20%), but I only know that Vanguard's TDF expense ratio is a net of 0.15% (and thus still cheaper) - what information value does that really provide to me? What should I do with that information, particularly if both funds track their indexes tightly? Should I chose to pay more for the other fund, simply because it "feels" like they are providing me with some kind of valuable information?

I respect everyone's desire for additional transparency and disclosure. But can anyone articulate to me what I'm supposed to do with this specific additional disclosure?
Actin
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Actin »

Flashes1 wrote: Tue Apr 13, 2021 2:15 pm
* I know whoever constructed the Target Retirement Funds for Vanguard is a lot smarter
This is the kind of mindset you need to get out of. Vanguard has a strong bias in favor of international. It's based on their own personal and political beliefs, not anything substantial.

It amazes me that people will mock crystal balls and palm readings, but you put the fortune teller in front of a computer and it becomes legitimate.
alex_686
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

hornet96 wrote: Wed Apr 14, 2021 2:04 pm Ok, then I'll ask you: If I know that another fund family's TDF costs 0.10% to operate, plus 0.10% in acquired fund fees (for a total expense ratio of 0.20%), but I only know that Vanguard's TDF expense ratio is a net of 0.15% (and thus still cheaper) - what information value does that really provide to me? What should I do with that information, particularly if both funds track their indexes tightly? Should I chose to pay more for the other fund, simply because it "feels" like they are providing me with some kind of valuable information?
I would frame the question slightly differently. You have a selection of target date funds. Which one do you pick? You create a list of criteria with weights and go from there.

How often do you you want to go through this process? Generally speaking, my holdings are long term so I have a long term view. Say 10 years.

With that I would put a very low weight on the difference on expense ratios. 5 bps is getting pretty close to being a measurement error. Considering the trend of expense ratios the difference in year-end selection could be 1 or 2 bps. That one is higher today may only have a modest impact on expenses over the next 10 years. Who knows, maybe the funds will switch positions next year.

I would put only slight more weight on tracking error. Considering how narrow the expense ratios are this is a better measure. However, I know that they are going to be tight. And the funds keep switching index providers. This makes things hard. Are they switching from one index to another because 1) the index is better (probably not), 2) the index methodology is easier to implement (maybe) or 3) licensing the index is cheaper (probably). And each switch makes getting high quality tracking error numbers harder.

I would probably put the highest weight on how they construct their portfolio.

And now to your question. I used to evaluate hedge funds for my brokerage to sell. There was a checklist. I did the operations stuff. It was of secondary importance but still important. Never approved a hedge fund because it had a high quality back office but some were knocked off because operations were second rate.

How sound is the company? Just not financially but is it sharp? Is it a thought leader or does it trail its peers by a decade? What are the conflicts of interests. How are they handled? Are they committed to high standards or just getting by? Are they papering over cracks with marketing buzzwords like "Rich Corinthian Leather" or "A Investor Owned Mutual Company"?

So to specifics. The regulation around mutual fund companies is high. Even following the minimal standards results in a high quality product. However, just doing the minimal amount of work and dodging hard questions is a yellow flag. As Vineviz says, it is a bad look for Vanguard. Lazy? Hiding something? Lack of regard for their customers? O.K., these are strong works that I am using to illustrate where the nature of my concerns are. Maybe they have a good reason to hide what is happening with our own company. I can't think of any but who knows. Like I said, yellow flags.

If they are slacking off here where else are they slacking off. Or more critically, where might they be slacking off 5 years down the line. I am looking specifically at the portfolio construction. Negotiations between the fund, fund family, the index provider is rife with conflicts of interests. It is always easier to resign the contract then negotiate a new one.

So, I don't own any target date funds. I like to self manage. I do own Vanguard funds. Vanguard is not my default option in major part because of discourse, reporting, and their poor ownership structure. Vanguard is in the top 4.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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hornet96
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

Alex_686, thank you for that thoughtful reply. From a due diligence perspective, I agree with a lot of what you said in this latest post.
alex_686 wrote: Wed Apr 14, 2021 2:58 pm I would put only slight more weight on tracking error. Considering how narrow the expense ratios are this is a better measure. However, I know that they are going to be tight. And the funds keep switching index providers. This makes things hard. Are they switching from one index to another because 1) the index is better (probably not), 2) the index methodology is easier to implement (maybe) or 3) licensing the index is cheaper (probably). And each switch makes getting high quality tracking error numbers harder.
This is a very good point. Constantly moving the goalposts around makes it hard to really measure tracking error, or at least understand whether you're looking at apples-to-apples comparisons. I agree with this point.
alex_686 wrote: Wed Apr 14, 2021 2:58 pm I would probably put the highest weight on how they construct their portfolio.
Agree 100%.
alex_686 wrote: Wed Apr 14, 2021 2:58 pm The regulation around mutual fund companies is high. Even following the minimal standards results in a high quality product.
Again, I agree with this. However, then in the next turn:
alex_686 wrote: Wed Apr 14, 2021 2:58 pm just doing the minimal amount of work and dodging hard questions is a yellow flag.
There seems to be some cognitive dissonance or something happening here. How can following the minimum standards result in both a "high quality product" and a "yellow flag" at the same time? Either you believe it's high quality and trustworthy, or low quality and therefore untrustworthy.
alex_686 wrote: Wed Apr 14, 2021 2:58 pm If they are slacking off here where else are they slacking off.
Similar to the above, you agree that they are meeting the minimum requirements and thus producing a high quality product due to the nature of the regulations. At the same time, they are "slacking off" by meeting those high quality standards?
alex_686 wrote: Wed Apr 14, 2021 2:58 pm Negotiations between the fund, fund family, the index provider is rife with conflicts of interests.
Yes, I agree. I noted elsewhere that related party reporting could probably be expanded upon or improved. Related party transactions have been a significant focus in audit regulation in recent years.
alex_686 wrote: Wed Apr 14, 2021 2:58 pm I like to self manage.

Me too. This is more of an intellectual exercise for me. :beer However, even after all of this, I still don't really see an articulable answer to the question:
hornet96 wrote: Wed Apr 14, 2021 2:04 pm What should I do with that information?
Seems like if I wanted a TDF, my only course of action is to pay more for a similar product offered by someone else, because I have a bad feeling about the way Vanguard meets the already high quality reporting standards? I am legitimately wondering what actionable information that "knowing" the more detailed breakdown of fund expenses would provide me, particularly if they still add up to a number that is smaller than the competitors' figures. Disclosure rules are predicated on their usefulness to investors, where the benefits of disclosure outweigh the costs. Can you articulate the benefits of knowing this relevant information in a more tangible way?
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

hornet96 wrote: Wed Apr 14, 2021 3:56 pm
alex_686 wrote: Wed Apr 14, 2021 2:58 pm The regulation around mutual fund companies is high. Even following the minimal standards results in a high quality product.
Again, I agree with this. However, then in the next turn:
alex_686 wrote: Wed Apr 14, 2021 2:58 pm just doing the minimal amount of work and dodging hard questions is a yellow flag.
There seems to be some cognitive dissonance or something happening here. How can following the minimum standards result in both a "high quality product" and a "yellow flag" at the same time? Either you believe it's high quality and trustworthy, or low quality and therefore untrustworthy.
Any car that is sold in the USA will have passed the NTSB crash tests. All of these cars will be very safe. All of these cars are probably safer than anything sold 20 years ago. But would you buy the lowest rated car?

Q: If the top student graduating from a medical college is called the valedictorian, what do you call the lowest graduating student?

A: Doctor.

Now, is this doctor a highly qualified professional? Yes, but would you hire this person for your medical center? I mean, if you want to call out the difference between a person who is constantly doing A level course work and C level course work here is a example. And this is not a hard and fast rule. I know of doctors who graduated from the top of their class and who are no good, while some bottom ones have just excelled. But it does give one pause.

So, there is no cognitive dissonance here. There is a high bar to meet. Many firm jump far above the bar and get a A+. Vanguard just clears the bar and get a C.

Back to investments. I have spent a good portion of my professionally career looking for problems in financial products. Give me any product and I can find yellow and red flags. That I can find them at Vanguard is not a issue.

Here is the issues. Vanguard seriously lags its peers in transparency, discourse, reporting, and their poor ownership structure. It is not a transit specific point. It is wide, broad, and chronic. it is not being addressed. They score well in other areas.

That they consistently lag their peers is the point that I am trying to drive home. Over many metrics, funds, and years. Why do we have this big anomalous issue?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
averagedude
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by averagedude »

I did a deep dive of the top ten target date fund companies that have 2055 funds. We are talking the Vanguard, Fidelity, TIAA, JP Morgan, Schwab, TRowe, American Funds, and several others. What I found is all of these companies have similar exposures, asset allocations, and long term investment returns. The difference between the best and worst returns was 1.53% over the last 7 years. As far as International exposure, the difference between the highest and lowest allocation is 58/42 and 70/30. I do acknowledge that a 1% of extra return over a long period of time can be a huge sum of money. It really opened my eyes how most of your risk and returns can be attributed to your asset allocation, which is the most important decision that an investor will make.
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