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Vanguard Set to Venture Into Low-Volatility Space

Likely available before the end of 2013, Vanguard's new fund will be actively managed. Also, Fidelity makes big changes to its Freedom Funds target-date investments, an additional manager signs on at the $8 billion Russell Strategic Bond Fund, a host of fixed-income manager changes at J.P. Morgan, and more.

On Sept. 27, 2013, Vanguard filed a preliminary prospectus with the Securities and Exchange Commission for a new fund, Vanguard Global Minimum Volatility Fund, which will invest in stocks around the globe. Vanguard expects the fund to be available in the fourth quarter of 2013. The fund will have two share classes, Investor and Admiral, with projected expense ratios of 0.30% and 0.20%, respectively.

Vanguard has been considering low-volatility options for at least three years. Unlike existing offerings in the low-volatility exchange-traded fund space, however, Vanguard says its fund will be actively managed as opposed to passively managed--somewhat surprising considering Vanguard's dominance and expertise in index funds. The fund won't be subadvised, either, as many of the firm's actively managed funds are. Instead it will be run by the firm's quantitative team, the Active Equity Group, which is now under fairly new leadership in John Ameriks. Ameriks, who assumed his current post in early 2013, is a Vanguard veteran and was instrumental in designing Vanguard's target-date funds and endowment-like managed-payout funds. The managers named in the prospectus are James Troyer, James Stetler, and Michael Roach.

Vanguard will look to invest in names that have exhibited lower volatility relative to other stocks in the FTSE Global All-Cap Index (USD Hedged). It also will consider correlations among stocks when constructing the portfolio. The FTSE Global All-Cap Index includes emerging markets, which can be volatile in and of themselves, but which also can provide diversification benefits and potentially reduce a broad portfolio's volatility over the long haul. The managers will hedge most of the portfolio's currency exposure; doing so can have a meaningful impact on a fund's volatility (and performance relative to actively managed global-equity peers). Although the fund will be actively managed, Vanguard's Active Equity Group typically aims for returns that are highly correlated with designated benchmarks.

Fidelity Announces Major Changes to Its Glide Path
Fidelity Investments just announced the latest in a series of recent and expected changes to its $170 billion line of Fidelity Freedom Funds target-date investments. In this round, investors will soon see equities play a more prominent role throughout the portfolios. Those on the brink of retirement in the 2015 fund will see a modest increase in the allocation to stocks, to 53% from roughly 50% currently. Investors entering their early middle ages will see the biggest change, as Fidelity will now hold the series' 90% maximum allocation to equities constant until investors reach their mid-40s. Currently, those investors are largely in the 2035 fund, which has a bit more than 80% allocated to stocks.

The changes are expected to roll out over the next several months and will make the Freedom Funds' overall asset allocation more closely resemble its two largest competitors, the Vanguard Target Retirement and T. Rowe Price Retirement target-date funds. Morningstar data shows that both competitors also start out by holding 90% of assets in stocks, with the former also holding that allocation steady until the 2035 fund, and the latter just beginning to modestly decrease its allocation to stocks at that point.

Fidelity last made major changes to its glide path in 2006, when an extension of its asset-allocation rolldown period resulted in a relatively larger equity stake for investors going into retirement. According to 2011 research released by Morningstar subsidiary Ibbotson Associates, the Freedom Funds' glide path has been relatively unstable, and that's especially true compared with the Vanguard and T. Rowe Price offerings.

The firm cites changing capital-market and asset-class assumptions as among the key reasons for this update, and the resulting boost in assets allocated to stocks should also help the series to better keep up with peers going forward. A comparatively risk-averse glide path has been a strong contributor to the Freedom Funds' disappointing long-term results. Over the last five years through September 2013, for instance, nine of the 12 Freedom Funds that have been around for that long trail their respective peer medians. Meanwhile, all of the Vanguard funds with at least five years of history rank in the top third of their groups, while the T. Rowe Price funds largely rank in their categories' top percentiles.

Those numbers have contributed to Fidelity's dwindling share of the target-date mutual fund market, though a few other general industry trends (such as a movement to index-based strategies) haven't helped. Flows into Fidelity's target-date strategies have remained positive--helped along by a set of index-based series launched in late 2009--though Fidelity's 8.2% organic growth in 2012 is well below Vanguard's 21.3% growth, as well as T. Rowe Prices 11.6% increase. From 2006 to 2012, Fidelity's overall market share of target-date mutual funds has declined to 32.4% at the end of 2012 from 47.8% in 2006.

The adjustments to the glide path come on the heels of a few changes to some of the funds' underlying holdings. In late 2012, for example, some of the firm's strongest managers began managing assets for the series, such as Will Danoff (of Silver-rated  Fidelity Contrafund (FCNTX) fame) managing Fidelity Series Opportunistic Insights (FVWSX) and Joel Tillinghast ( Fidelity Low-Priced Stock (FLPSX)) on Fidelity Series Intrinsic Opportunities (FDMLX). The changes were positive steps forward in addressing criticisms that bland, index-hugging strategies dominated the Freedom Funds' lineup. A move by the series' sister target-date strategies, offered via the firm's institutionally focused Pyramis business unit, to use tactical asset allocation also portends more enhancements to come. Time will tell whether these changes can put one of the industry's behemoths back on the right path.

Manager Addition at Russell Strategic Bond on the Heels of Changes Up Top
Neutral-rated  Russell Strategic Bond  has gained a new manager now that Gerard Fitzpatrick, the fund's lead manager since August 2011, has been promoted to chief investment officer of global fixed income effective Oct. 1. Fitzpatrick now will be responsible for overseeing portfolio management and research activities for the global fixed-income team. Keith Brakebill, who currently manages a number of Russell's multimanager fixed-income funds, joined the $8 billion Russell Strategic Bond as comanager on Oct. 1 to help alleviate some of Fitzpatrick's portfolio management responsibilities. Brakebill has been a portfolio manager for the firm since August 2011, and prior to that he spent several years as a research analyst on the firm's fixed-income team. While Brakebill will handle the day-to-day activities of managing the fund, Fitzpatrick will continue to drive the overall strategic direction and any key decisions will be made on a joint basis.

Fitzpatrick's promotion was the result of other changes at the firm's investment leadership level. Jeff Hussey, who had been the CIO of global fixed income, was promoted to global chief investment officer. Hussey has been with Russell for 20 years and had been the lead portfolio manager on a number of the firm's bond funds. Hussey replaces Peter Gunning, who has held the global CIO role since 2008 and will return to his native Australia to lead the firm's Asia-Pacific region.

 

Friess Associates Closes on Buying Back Ownership Stake From AMG
Last week, the employees of Friess Associates, the advisor for the Brandywine Funds, closed on their deal to buy back a majority ownership stake in the firm from  Affiliated Managers Group (AMG). The price tag of the deal was not announced.

Friess advises the $825 million, Neutral-rated  Brandywine (BRWIX), the $281 million, Neutral-rated  Brandywine Blue (BLUEX), and the $139 million, unrated Brandywine Advisors Midcap Growth  funds. The move ends a decade-plus-long relationship between the two firms. While it's not clear what drove the move, Friess has been dealing with poor performance, outflows from the funds, employee turnover, and succession planning.

With the closing of the deal, which was announced back in June, the assets in the existing Brandywine funds have been transferred to three new funds. Friess has become a subadvisor to the new funds and the managers have remained in place. Some other noticeable changes have taken place, however. Fees have declined slightly, and the funds now carry AMG's Managers Trust naming convention.

AMG paid $241 million in cash in 2001 to buy 51% of Friess Associates. It purchased another 19% interest in Friess Associates in 2004, with the remainder of the firm owned by Friess employees. Firm founder Foster Friess was not part of the most recent buyout but remains a fund shareholder.

Curian Launches Risk-Parity Fund Subadvised by AQR
Curian Capital, a subsidiary of Jackson National Life Insurance Company, launched the Curian/AQR Risk Parity Fund on Sept. 16, 2013. This institutional product has already garnered more than $300 million in assets, likely because it serves as an underlying investment for variable insurance contracts and retirement plans distributed by Jackson. It is only available to qualified and nonqualified plans issued by Jackson, separate accounts, and registered investment companies. Investors may access the fund indirectly through a variable annuity issued by Jackson. AQR Capital Management subadvises the fund for Curian Capital.

In contrast to traditional asset allocation, a risk-parity strategy allocates capital across asset classes in order to balance a portfolio's exposure to different sources of risk. This fund specifically seeks to balance its exposure to equity, fixed income, and inflation risk by investing in global stocks, global nominal and inflation-protected government bonds, currencies, and commodities. Lower-risk asset classes tend to receive relatively large weights in the portfolio. However, the fund may gain exposure to each asset class through derivative instruments, including swaps, futures, and forward contracts, which can create financial leverage. The fund aims to offer comparable volatility to a traditional 60/40 portfolio of stocks and bonds, but offer better diversification and more attractive risk-adjusted returns over the long run. AQR actively manages the fund and may incorporate value and momentum into its asset-allocation strategy.

Fixed-Income Manager Changes at J.P. Morgan
Gary Madich has been promoted to vice chairman of investment management at J.P. Morgan Asset Management, and as a result, he stepped down as one of the portfolio managers of JPMorgan Core Plus Bond (ONIAX) on Sept. 25.

Joining the portfolio management team in Madich's place and signing on as one of the $2.5 billion fund's five managers is Steven Lear, who oversees U.S. broad-market strategies for the U.S. macro-driven investment team. Prior to joining J.P. Morgan in 2008, Lear was at Schroder Investment Management for 10 years and served as the firm's head of U.S. fixed-income securities for seven years.

In addition, effective March 1, 2014, another of JPMorgan Core Plus Bond's managers, Duane Huff, will be retiring from the firm. Huff, who is in his early 60s, will continue to serve as a portfolio manager on the fund until his retirement date. In preparation for his departure, J. Andrew Norelli has joined the fund's portfolio management team, although he will not replace Huff in the fund's prospectuses until March 1.

Norelli is a member of J.P. Morgan's Global Fixed Income group and a portfolio manager within the diversified solutions team. In this role, he is responsible for developing new products and managing diversified strategies, focusing on international developed markets, emerging markets, and macroeconomic strategy. Prior to joining the firm in 2012, Norelli had spent more than 11 years at Morgan Stanley, where he most recently served as co-head of the firm's emerging-markets credit trading desk.

JPMorgan Core Plus Bond will continue to be managed by Mark Jackson, who has been on the fund since 1996, Frederick Sabetta, who has been aboard since 2006, and Richard Figuly, who also has been on the fund since 2006.

No changes are planned to the fund's investment process and investment objective.

Guinness Atkinson Adds Manager to Energy Fund
In September, Guinness Atkinson Asset Management added Jonathan Waghorn as a comanager of Guinness Atkinson Global Energy (GAGEX).

Waghorn has stepped aboard alongside longtime fund managers Timothy W.N. Guinness and Will Riley on the $72 million fund. Waghorn joined the fund's advisor, Guinness Atkinson Asset Management, after previously serving as comanager of a European fund, Investec Global Energy, from 2008 until 2012. In that role at Investec, Waghorn succeeded Tim Guinness, who had managed Investec Global Energy from 1998 until 2008. (Guinness Atkinson Asset Management's sister company, London-based Guinness Asset Management, was the outsourced manager for Investec Global Energy until February 2008, when Guinness Asset Management launched an offshore energy fund.) Prior to his time at Investec, Waghorn had been the co-head of Goldman Sachs' energy equity research team.

As part of the transition, another comanager, Ian Mortimer, stepped down from Guinness Atkinson Global Energy in September and now is focusing on the other two funds he comanages, the minuscule Guinness Atkinson Inflation Managed Dividend  and the larger Guinness Atkinson Global Innovators (IWIRX).

Associate director of parent/stewardship Bridget Hughes, senior fund analyst Janet Yang, and fund analysts Alex Bryan, Michelle Canavan, Robert Goldsborough, and Flynn Murphy contributed to this report.

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