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Vanguard Introduces Long-Termers' Shares


The Vanguard Group's new Admiral share class that it will launch later this year will serve to reinforce the firm's name while protecting its buy and hold investors from rising redemption rates, according to industry analysts.

"This is consistent with Vanguard putting an emphasis on low expenses and long-term investing," said Burton Greenwald, president of B.J. Greenwald & Associates, a mutual fund consulting firm in Philadelphia. "It conforms with their philosophy and image."

The new share class is designed to reward investors with large accounts who use a buy and hold strategy in certain Vanguard funds by reducing expense ratios. Retail shareholders that hold $50,000 or more in a fund for 10 years or investors that hold $150,000 in an account for three years will be eligible for the new share class, Vanguard, of Malvern, Pa., announced last week.

Customers with investments of $250,000 can invest in the shares immediately. Investors will be allowed to transfer funds into the Admiral share class without being subject to capital gains taxes, according to the company.

The new share class will separate buy and hold investors, momentum investors and investors with shorter holding periods, said Steve Cummings, an analyst with Financial Research Corporation of Boston.

"[The new share class] will serve to brighten the lines between investors that use buy and hold strategies and those that choose to engage in more frequent changes in their portfolio mix such as through exchange-traded funds," he said.

The new class will have administrative costs that are as much as 25 percent less than Vanguard's investor share class. The new share class' administrative costs will be kept low by moving shareholder services for the class online. Investors with less than $250,000 that want the Admiral class shares must register their accounts online. Conversion to the new shares will then be processed online, the company announced.

The new share class will be offered on the Vanguard 500 Index Fund, Vanguard Total Market Index Fund, Vanguard Extended Market Fund, Vanguard Growth Index Fund, Vanguard Value Index Fund, Vanguard SmallCap Index Fund and Vanguard Balanced Index Fund.

"Our new Admiral share class reflects the simple reality that large accounts and loyal shareholders create tremendous cost savings for all fund shareholders," said John Brennan, chairman and CEO of Vanguard, in a statement. "These shareholders should receive the benefits of that cost efficiency."

But the new class will result in an increase in the expense ratios of the other share classes, the company said. In some cases, the increase may be as much as three basis points, depending on net inflows and a fund's costs, according to the company.

The new share class is also a strategy to establish a greater degree of loyalty among larger investors, said Geoff Bobroff, president of Bobroff Consulting of East Greenwich, R.I., a mutual fund consulting firm.

"They are putting cost on the side of loyal and larger investors," he said.

With the launch of the new Admiral and VIPER share classes later this year, Vanguard will offer four separate share classes on its funds, including its investor and institutional share classes.

"I think it serves the purpose of heightening awareness of issues in a smart way," said Cummings. "Vanguard's public image espouses a buy and hold strategy or at least not to react to market conditions at a whim."