The day founder John C. Bogle died, Vanguard Group, the Malvern investment giant, reposted a familiar statement of what the company has long told investors sets it apart in a filing with the Securities and Exchange Commission.
The statement, in a section titled “Plain Talk About Vanguard’s Unique Corporate Structure," reads:
“The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a private group of individuals, or by public investors. ... The management fees charged by these companies include a profit component over and above the companies’ cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds’ expenses low.”
But in other recent filings, starting late last year, Vanguard has stripped out most of that language. “We are streamlining and simplifying our disclosures,” said company spokesman John Woerth. On Jan. 25, in an annual filing for a batch of Vanguard funds, the company published just this shorter note:
"The Vanguard Group is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that are owned by third parties — either public or private stockholders — and not by the funds they serve.”
The new language has “more precision” and will likely help Vanguard avoid “nuisance” litigation, suggested Barry Ritholtz, chairman of Ritholtz Wealth Management, a New York firm that invests in Vanguard funds, among others.
In the new filing and other current Vanguard statements to the SEC and investors, there is:
Tax lawyers, including ex-Vanguard attorney-turned-whistle-blower David Danon, have said real “at-cost” pricing would risk violating federal tax law, which requires companies to charge their affiliates the same prices that they would pay for services bought from outside firms, so as not to artificially manipulate reported earnings to reduce a company’s income tax liability.
While dropping those claims from its SEC filings, Vanguard has continued to add online marketing materials, emphasizing general benefits from the company’s particular corporate structure, like a video ad — “Welcome to a new way of investing” — in which a diverse group of investors says such things as “The idea that investors own the company is something that really resonates with me” and “The thing about being client-owned is, there is no ‘us’ and ‘them.’"
In fact, Vanguard managers are directly responsible, not to shareholders, but to a self-renewing board, initially appointed by Bogle, headed by successors who pick new members, and are routinely reelected in uncontested elections.
Unlike U.S. public companies, Vanguard doesn’t report executive compensation, nor does it disclose marketing spending. Vanguard, which now owns about 8 percent of U.S. companies and a growing percentage of foreign stocks, does insist on transparent governance practices for the companies it buys with investor money.
Vanguard has become one of the largest and, since the 2008 financial crisis, the fastest-growing U.S. investment company, with $5 trillion in assets. The company has run far past competitors while promoting its lower-than-industry-average fees and its focus on index funds, which, as Bogle was fond of noting, tend to outperform high-fee funds run by stock-pickers, over time.
Why change now? Spokesman Woerth said Vanguard has been “simplifying” since its 1995 “education-oriented prospectus” for shareholders. For example, he pointed out that Vanguard general counsel Anne Robinson (one of several high-ranking legal, accounting and compliance figures hired from outside who have helped beef up its disclosure capabilities in recent years) sent the SEC a letter last October urging the regulatory agency to streamline current fund reports into a single yearly electronic report (with paper copies for those who still need them), but also urging the agency not to get too detailed in its reporting guidelines.
Did Vanguard make a point of holding on to the familiar old language while founder Bogle was alive? Woerth notes the new language began going out in reports late last year, for example in a new prospectus for Sector Bond Index Funds, on Dec. 22, 2018 (p. 51).