Vanguard Asset Allocation Fund
From Bogleheads
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| Company: | Vanguard |
|---|---|
| Fund category: | N/A |
| Benchmark: | N/A |
| Start date: | 11/03/1988 |
| Expense ratio: | 0.37% |
The Vanguard Asset Allocation Fund is an actively managed product which uses quantitative models to shift its asset allocation among stocks (represented by the S&P 500), long-term U.S. Treasury bonds, and money market instruments. This strategy is referred to as tactical asset allocation or, less euphemistically, market timing. According to the prospectus:
The Fund allocates its assets among common stocks, bonds, and money market instruments in proportions consistent with the advisor’s evaluation of their expected returns and risks. These proportions are changed from time to time as risk-adjusted return expectations shift. The Fund may invest up to 100% of its assets in any one of the three asset classes.
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For the Fund’s stock allocation, the advisor can use a diversified portfolio of stocks selected to parallel the performance of the S&P 500 Index, or it can use S&P 500 stock index futures. For the Fund’s bond allocation, the advisor can use long-term (10- to 30-year maturities) U.S. Treasury bonds (or other “full faith and credit” obligations of the U.S. government), or it can use U.S. Treasury bond futures. The Fund’s cash investments may include a variety of money market instruments, including U.S. Treasury bills, government agency securities, high-quality commercial paper, and certificates of deposit.
Mellon Capital Management Corporation, the fund's advisor, alters the asset allocation frequently. The Fund Holdings page on the Vanguard website reports that as of 11/30/2008, the fund invested 100% in equities.
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Asset Allocation Change History
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Share Classes
Two share classes are available to individual investors:
- Investor Shares (VAAPX), with an expense ratio (ER) of 0.37%, and an initial minimum investment of $3,000.
- Admiral Shares (VAARX), with an expense ratio (ER) of 0.27%, and an initial minimum investment of $100,000, except $50,000 suffices for conversion of an Investor Shares account in existence 10 years.
There are no ETF, Signal or Institutional share classes for this fund.
Advantages
Fully Automatic Investing
An investor who does not wish to make asset allocation decisions is relieved of this task by the fund's advisor.
Low Costs
According to Vanguard's Asset Allocation Fund fees & minimums webpage, no purchase or redemption fees are assessed. Further, the fund's expense ratio of at most 0.37% compares very favorably to the 1.20% charged by the average moderate allocation fund.
Criticisms
Market Timing
Unlike most Vanguard offerings, the Asset Allocation Fund explicitly times the securities markets (engages in market timing. This feature produces at least two direct disadvantages.
- An investor in the fund is unable to pin down his or her long-term personal asset allocation, since sudden shifts between stocks, bonds, and cash are possible.
- There is the risk that the manager(s) will make unfortunate timing decisions, leading to poor performance.
Limited Investment Universe
The fund cannot invest in many asset classes/subclasses, such as international stocks, small cap U.S. stocks, inflation-protected bonds, and short to intermediate term nominal bonds.
Potential Tax Inefficiency
The Vanguard Asset Allocation Fund should not be held in a taxable account, except by an investor in a very low tax bracket. The fund can invest in taxable fixed income securities, causing it to pay nonqualified dividends. Additionally, the fund may experience high portfolio turnover due to its basic nature, leading to distribution of significant capital gains (which may be short term). See Vanguard Asset Allocation Fund Distributions for the fund's distribution history, 1997-2008.
Performance
This historical returns webpage provides the fund's performance. The fund has been in existence since November, 1988. Since inception through 12/31/2008 it has had an average annual return of 8.26% compared to the 9.34% benchmark return. During the 2000-2002 bear market, the Asset Allocation Fund lost a total of 15.93%, as compared to the all-stock 500 Index Fund's loss of 37.71% during the same period. In the 2008 bear market the fund provided a -36.39% return, nearly matching the -37.02% return of the S&P 500 index.
The webpage also provides VAAPX results for each of the last 16 calendar years. Its best calendar year result was +35.46% (1995), and its worst was -36.39% (2008).
Vanguard benchmarks the Asset Allocation Fund to the Asset Allocation Composite Index, which consists of 65% S&P 500 Index and 35% Lehman Long U.S. Treasury Index. Its best calendar year result was +35.20% (1995), and its worst was -19.21% (2008). The -17.17% tracking error to the benchmark in 2008 is the largest tracking error in the fund's history.
Vanguard Institutional reports updated three year standard deviations of monthly returns. This measure of return volatility shows the fund had a 14.63% standard deviation compared to the 9.72% standard deviation of the benchmark as of 11/31/08.
History
Inception dates of Vanguard Asset Allocation Fund's two share classes are as follows:
- Investor Shares: 11/03/1988
- Admiral Shares: 08/13/2001
The fund's fiscal year ends on 9/30 of each year.
Links
See also
