Vanguard’s board of directors, or trustees, are the individuals charged with watching over the portfolio managers who watch over our money. So, where do they put their own investable cash? Which funds are the most popular with the folks charged with representing shareholders’ interests? Are they eating their own cooking?
Well, yes and no.
Chairman Jack Brennan is, not surprisingly, a huge Vanguard fund fan. He’s holding more than $100,000 in shares in 29 different funds (Brennan finally bought Health Care (VGHCX) in 2007) and between $50,001 and $100,000 in another six funds. (Financial regulators say all fund directors must disclose their holdings in one of five categories, $0, $1 to $10,000, $10,001 to $50,000, $50,001 to $100,000 and over $100,000.
No other director can match Brennan in the investment department, though James Wilson, who at 72 is probably on the verge of retiring from the Board and has been there even longer than Brennan, has over $100,000 in 17 funds. Wilson is the former chairman of chemical giant Rohm and Haas.
Most of the other directors seem to have made a decent commitment to Vanguard’s family of funds, but I wouldn’t call their overall portfolios broad in the sense that they have personal money at work in lots of different options (see also, “10 Things Vanguard Won’t Tell You“). Charles Ellis, who joined the Board in 2001, and whose firm, Greenwich Associates, is a paid consultant to the Vanguard Group, owns just two funds, Emerging Markets Index (VEIEX) and Pacific Index (VPACX). Rajiv L. Gupta, Rohm and Haas’ current Chairman, has been a Board member since 2001 and has holdings in just three equity funds–500 Index (VFINX), Equity Income (VEIPX) and SmallCap Growth Index (VISGX)–plus Limited-Term Tax-Exempt (VMLTX) and Tax-Exempt Money Market (VMSXX). Maybe he finally got the word after I wrote last year that he owned just two Vanguard funds, an even paltrier showing.
Full Disclosure
What’s fascinating about the most recent disclosure of the Board’s investments is that, for the first time, a domestic index fund is not the most popular holding. In fact, while five directors each own 500 Index and International Growth (VWIGX), it’s Emerging Markets Index that captures the top spot, with six directors who hold more than $100,000 each in fund shares at the end of 2007.
Both Amy Gutmann, President of the University of Pennsylvania, and JoAnn Heffernan Heisen, a Johnson & Johnson executive, jumped into the fund in 2007 after having no assets allocated there in 2006. Both ended the year with more than $100,000 invested.
While several directors have money stashed in Tax-Free Money Market, and all but Ellis own at least one Vanguard money market fund, I’m surprised to see that none is using the state funds for New Jersey or Pennsylvania residents.
U.S. Growth lost Gutmann as a shareholder in 2007, and is now down to two Board members who own shares. Gutmann also apparently sold shares in Explorer (VEXPX), knocking her holdings down from over $100,000 to the $50,001 to $100,000 category.
Growth Equity (VGEQX), arguably one of the worst performers in the family alongside U.S. Growth, retains just one director as a shareholder…</> though Brennan’s commitment of between $1 and $10,000 is hardly worth sneezing at. Since I’ll assume he put up the required $10,000 minimum to get into the fund, it’s almost a certainty he’s under water in that investment.
How Many Funds Are Ignored by the Board?
How many of Vanguard’s funds don’t have a single director as a shareholder? More than half. Of course, I’m not surprised that the directors aren’t investors in most of Vanguard’s annuities, and when you’re wealthy, it often makes sense to avoid taxable bond funds, except in tax-deferred accounts, and invest solely in tax-frees.
One question is, should you care whether a fund Trustee is investing alongside fund shareholders? Yes. First, I’ve found that shareholders want to know this information. Even Vanguard’s former chairman and founder Jack Bogle is now a big believer after years of saying that this kind of disclosure was unnecessary (to see how you can get in on the action of closed Vanguard funds, you’ll want to read, “4 Ways to Kick In the Door of a Closed Fund“).
I would take it a step further, though. I don’t believe the current level of disclosure is sufficient. What I’ve argued for years is that, as “directors” of these funds, Vanguard’s Board should be compensated with fund shares, not cash as they are now. (Directors are paid approximately $145,000 per year, and some receive retirement benefits under a former directors’ plan.) They’ve got plenty of cash to put into their Vanguard portfolio.
Keeping a Careful Watch
Let the directors decide which of the funds they receive as compensation to sell and which to hold on to or add to. And let shareholders decide, then, whether the information about where the insiders invest is relevant or not. While we’re at it, let’s update the disclosure with real numbers in dollars, rather than vague categories like “over $100,000.” I would hope that, wealthy as they are, Vanguard’s directors have a bit more than $100,000 in some of the funds they’re supposed to be keeping a watchful eye on.
While I don’t think my proposals will be readily adopted by the fund industry, I still think it’s worth keeping the notion alive in case a real reformer takes a seat at the SEC, or another scandal hits and policy makers wonder how to make fund oversight both more comprehensive and a “pocketbook” issue for all concerned.
When there’s breaking news at Vanguard, the Board of Directors won’t tell you what’s in your best interest. But Dan will. With the latest announcements that Total International (VGTSX) is changing its investment policies, two long-closed funds have been reopened and Chairman Jack Brennan is stepping down, what should you do? Not to worry: Try The Independent Adviser for Vanguard Investors now, and Dan will keep you one step (and 144%) ahead of the average Vanguard investor.
