Vanguard to Market Timers
February 18, 2002
The Vanguard Group has, once again, put its foot down with market timers. The second largest fund group will begin imposing new, more restrictive measures aimed at further limiting market timing activity within the fund complex.
In a recent regulatory filing, Vanguard warns investors that starting March 18 it will implement new exchange limitations on all funds and for all types of shareholder accounts. That includes IRAs and 401(k) plans.
While Vanguard is imposing one set of restrictions for its index and international funds, and a second set of limitations for all of its other funds, the message to market timers is crystal clear: If you want to time the market, find a different fund group.
Pulling the Plug Early
For all index and international funds, Vanguard will impose a new 2:30 p.m. EST cut-off, after which no exchange requests in or out of a fund will be honored.
Currently, Vanguard permits exchanges until markets close at 4:00 p.m. EST.
The new policy applies to all exchange requests that are made via telephone or the Web. On days when the stock exchanges close earlier than 4:00 p.m., Vanguard will impose an exchange privilege blackout period that begins an hour and a half prior to the market's close.
In addition, no more than two exchanges out of a fund by telephone or Web instructions will be allowed on all of Vanguard's funds during a rolling 12-month period.
Moreover, Vanguard will mandate that each round trip be at least 30 days apart and it is reserving the right to, in its sole discretion, determine what a "substantive" dollar amount will mean for each individual fund.
Vanguard did not return calls seeking comment.
In the past, Vanguard has been a vocal opponent of market timing within its mutual funds and, on occasion, has been known to kick frequent traders out of its funds.
Other firms have limits on the number of exchanges a shareholder can make and may impose a fee or revoke someone's exchange privileges. Janus, for example, allows a maximum of four round trips, or exchanges out of its funds, within a calendar year. T. Rowe Price allows one round trip every six months with the exception of money market funds, which are exempt from the rule.
Both firms closely monitor exchange activity and reserve the right to kick shareholders out of their funds, but neither firm imposes an early deadline on exchanges similar to Vanguard's new policy.
Timing Pros and Cons
"Generally, I favor these types of [strict exchange] policies because they reduce costs for long-term shareholders and encourage investing for the long-term," said Mercer Bullard, founder and CEO of Fund Democracy, a fund advocacy group. Bullard, a former assistant chief counsel to the SEC, is also a Vanguard investor. Vanguard has ample disclosure that states that its funds are not intended for short-term traders, Bullard said. These types of limitations are not only fair, but also prudent for shareholders.
But not everyone agrees.
A Line in the Sand
Vanguard is essentially drawing a line in the sand, said Paul Schatz, chief investment officer of Beneficial Capital in Woodbridge, Conn., and chairman of the Society of Asset Allocators and Fund Timers, Inc. (SAAFTI), an association of active money managers who frequently reallocate clients' assets among funds. "The blackout period is completely arbitrary and unfounded and will prevent people from moving their money at will," Schatz said. That can be especially troubling if something happens in the market, the economy or even the world at 2:31 p.m., he said. Since most active advisers move their money between 2:30 p.m. and 4:00 p.m., Vanguard is saying we don't want anything but buy-and-hold investors. "I have a tough time swallowing this," Schatz said.
Fund company initiatives to inhibit or even ban market timers are precisely why many have taken their clients' assets out of mutual funds and invested in much more flexible exchange-traded funds (ETFs) he added.
Protection Policy or Paternalistic Advice?
"Many professional advisers have already learned to stay away from funds like Vanguard and T. Rowe Price because they don't tolerate market timers," said Sam Jones, president of R.E. Jones & Associates in Denver, and the president of SAAFTI. "But mutual funds are not in a position to dictate how long- or short-term an investor should be able to hold a fund. That's not their job. That would be an advisory role," he said.
"It's an annoyance," said Dan Traub, chief investment officer of Tandem Financial Services of Canton, Mass., a SAAFTI member firm. "But all it means to me is that I can't trade after 2:30 p.m. It won't stop me from doing business with Vanguard," he said. According to Traub, his firm has approximately $20 million invested with Vanguard for various clients.
Vanguard may be imposing a cut-off on exchanges that is earlier than most. Other groups that don't prohibit market timers outright have cut-off times that are closer to the close of the market, said active managers.
Some fund groups that have built their complexes solely to cater to the population of active market timers, have tried to set later limits that allow advisers to come and go at will. Bethesda, Md.-based RYDEX Funds, for example, allows exchanges up until 3:30 p.m. on any of its sector funds and until 3:45 p.m. daily on its index-based funds. "We want to work with planners who are active planners and give them as late a time as possible, realizing that we also need time to close the fund and price it," said Anna Haglund, a RYDEX spokeswoman.