Vanguard in Favor of More Fund Holdings and Cost Disclosure By IndexFunds.com Staff February 12, 2003

The Vanguard Group said it supports the SEC proposal that could force mutual funds to disclosure more information about portfolio holdings and fund costs, according to a statement released today by the Valley Forge-based fund shop. The SEC comment period on the proposal concludes at the end of this week.

"Vanguard has filed a comment letter with the SEC noting that we have long advocated many of the proposals because they will provide mutual fund shareholders with useful information in a cost-effective manner," said Vanguard in the statement.

If the SEC approves the proposal, funds would be required to disclose all portfolio holdings on a quarterly basis, rather than semiannually as they are required now. The holdings information would be posted 60 days after the end of the quarter on the SEC website (and also potentially on the fund family's own website). Funds would be permitted to include a summary of holdings in their annual and semiannual shareholder reports, but would be required to provide a hard copy of all holdings, free of charge, upon shareholder request.

Vanguard said it is in favor of fund holding summaries because they are more investor-friendly, and because they would cut costs for its index funds that hold a high number of securities.

"The proposed way in which funds would disclose holdings is a victory for Vanguard, because many of Vanguard's index funds own a lot of stocks," said Vanguard founder John Bogle in a previous interview. "The new reporting requirement would involve a list of the largest holdings, and industry groups for the rest. All of the sudden the annual reports aren't so long, and that saves money." Bogle heads a research foundation funded by Vanguard, but is no longer actively involved in the firm's management.

Vanguard estimates that using a holdings summary schedule for its Total Stock Market index fund (VTSMX) could eliminate dozens of pages from reports sent twice a year to about 400,000 shareholders. The resulting savings would amount to about $58,000 annually in paper and printing costs, and an additional $83,000 in postage, according to Vanguard.

In today's statement, Vanguard said the two-month lag in portfolio disclosure would protect fund investors from such predatory trading practices as "front running" by aggressive traders, and "free riding" by investors seeking to copy a fund's proprietary approach and research.

"Whenever the topic of increased holdings disclosure came up in the past, we were always concerned about cost to shareholders and about front-running issues," said Vanguard spokesman John Woerth in an interview. "However, we're satisfied with the SEC proposal because it won't have an adverse affect on our shareholders."

Fear of front running may be less of an issue for Vanguard than for other fund firms because its popular index funds are virtually transparent, and its active funds have relatively low turnover.

Vanguard said it also supports the increased fund costs disclosure included in the SEC proposal. The SEC is proposing to require funds to reveal in shareholder reports the cost in dollars associated with a $10,000 investment based on: actual expenses and actual returns for the period covered by the report, and actual expenses and an assumed return of 5% for the period covered by the report.

"Increased cost disclosure is a positive thing for Vanguard, partly because Vanguard is the low-cost provider," said Bogle. "Yes, funds should tell shareholders how much they paid each year in expense ratio, both as a percentage and as a dollar amount. Shareholders are certainly entitled to know how much they're paying."

"We hope the SEC will move quickly on these important initiatives that will improve disclosure and save fund investors millions of dollars," said Woerth.