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Fund Times

Fund Times: Vanguard Adopts New Benchmark for SRI Fund

Plus, TIAA-CREF tries to alter the past, news on PBHG, and more.

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By year-end 2005, Vanguard will change the primary benchmark for  Vanguard Calvert Social Index (VCSIX) to the FTSE4Good US Select Index. The international FTSE4Good Index was first launched in 2001 by the London-based FTSE Group to "measure the performance of companies that meet globally recognized corporate responsibility standards, and to facilitate investment in those companies." Specific details have yet to be released on the makeup of Vanguard's narrower version of the FTSE index. However, the FTSE4Good US Index invests in more than 700 large-capitalization U.S. stocks focusing on three areas: environmental sustainability, upholding and supporting universal human rights, and developing positive relationships with stakeholders. The index will not include companies that are in the tobacco, alcohol, adult entertainment, firearms, gambling, or nuclear power industries, or those that violate fair-labor practices or equal-opportunity standards.

Although the press release stated that the change would not have "a material impact" on the fund's 0.25% expense ratio, we suspect that Vanguard may have moved to a new index provider to save a few basis points in expenses. In particular, if Vanguard eventually releases a socially responsible ETF using this index, a lower fee structure would be a plus. And although we haven't seen the composition of the new index, it may well be less growth-oriented than traditional socially responsible indexes.

Whatever the case, Vanguard's decision to change the fund's index is a blow to socially responsible heavyweight Calvert.

TIAA-CREF Tries Again
We first reported in mid July that TIAA-CREF wanted to change the expense structure for most of its funds. However, shareholders rejected the idea, which would have seen fees rise in some cases from two to six times what they cost now. But, a Wall Street Journal article this past week claimed that the firm is considering holding another vote and lobbying several large institutional clients to change their votes.

Aside from the fact that we view TIAA-CREF's continuted attempts at raising fees to be extremely unfriendly to shareholders, we're hard pressed to understand how institutional voters--who mostly represent 529 plans--can honor their fiduciary responsibilities by changing their votes. Moreover, one has to wonder why TIAA-CREF's fund board doesn't consider hiring Vanguard as the funds' advisor, if TIAA-CREF is truly incapable of managing the funds at their current expense levels.

Big Changes at PBHG
Liberty Ridge, formerly known as Pilgrim Baxter, will cease to exist as a money manager at the end of October. All of the firm's funds will be subadvised by a New York-based, institutional/separate account shop called Forstmann Leff, in which Liberty Ridge parent Old Mutual intends to buy a 60% stake. The funds will all take on the moniker "Old Mutual Forstmann Leff".

Two PBHG managers, Jerome Heppelmann and Sam Baker, plus four analysts will likely join the new firm, but continue to work out of Wayne, Pa., running  PBHG Large Cap (PBLVX),  PBHG Focused (PBFVX),  PBHG Tech & Communications (PATCX), and  PBHG Emerging Growth  (PBEGX), plus the growth half of PBHG Strategic Small Company (PSSAX). The remainder of the funds will be run by Forstmann. Incidentally, several planned fund mergers were cancelled, but mergers will likely occur following the acquisition of Forstmann at the end of October. Although Forstmann has not run open-end mutual funds to date, the firm's track record managing separate accounts is a mixed bag. For example, their mid-cap offering is a solid performer, frequently beating the category average on a year-to-year basis, whereas its large-cap option has had a hard time standing out from the crowd.

Finally, we're happy to hear that the funds will also see further fee cuts beyond those mandated by the market-timing settlement.

Oberweis Asset Management, Inc. (OAM), launched a new fund, Oberweis China Opportunities (OBCHX). The fund is managed by James Oberweis, who also manages Oberweis Micro-Cap (OBMCX) and Oberweis Mid-Cap (OBMDX). Vanessa Shiu, based out of OAM’s Hong Kong office, will perform analytical work for the fund. The fund will target smaller Chinese companies that focus on the increasing purchasing power of the Chinese consumer. Additionally, the fund will employ the firm's "Oberweis Octagon" strategy, looking at such things as rapid growth in revenue, rapid growth in pretax income, and reasonable price/earnings ratio in relation to the company's underlying growth rate, among others. The fund is expected to carry an expense ratio of 2.49%, which is more costly than the typical Pacific/Asia ex-Japan fund's 2% levy. This offering is just the latest in a line of funds trying to make a play on China's growth, and as with most of the others, it is best avoided.

Former manager Dan Ahrens left Mutuals Advisors on Sept. 7, 2005 for undisclosed reasons. Charles Norton has replaced Ahrens on two of the firm's funds, Vice Fund (VICEX) and Generation Wave Growth (GWGFX). Norton has no public experience managing open-end mutual funds, although he previously worked as an analyst for a New York-based hedge fund.

Dieter Bardy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.