In rare move, Vanguard beefs up international exposure in target date funds

Fund giant also plans to launch lower-cost institutional series to expand its market reach.

The Vanguard Group Inc. is beefing up its target date fund lineup with an institutional share class. It is simultaneously making what could be described as a market call with allocation shifts of 10 percentage points to international from domestic stock and bond allocations.
The Institutional Target Retirement Fund lineup, scheduled to launch by the end of June, will offer lower fees — 10 basis points compared with 16 to 18 basis points for Vanguard’s retail-oriented 12-fund target date series — by allocating to institutional share-class mutual funds.
The international equity allocation for existing funds will rise to 40% from 30%, and the international bond allocation will increase to 30% from 20%. The new class of fund will launch with those higher international allocations.
Vanguard spokeswoman Emily White said the increased allocation to international stocks and bonds as a move toward greater diversification that is being made possible through lower-cost access to non-U.S. investments.
Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, said the higher allocation to international stocks and bonds makes sense but is beyond the kind of move one normally expects from a company like Vanguard.
“Typically, with Vanguard, you see asset allocation stay very static,” Mr. Rosenbluth said, adding that the change might have to do with Vanguard’s broadened suite of international offerings.
“They now have more products to choose from,” he said. “Plus, we’ve seen a strong bull market for U.S. stocks, and everything outside the U.S. is trading at a discount, so perhaps this gives them a chance to sell out of some U.S. equities and buy lower-priced international exposure.”
Mr. Rosenbluth does not expect Vanguard to undertake such bold asset allocations shifts on a regular basis.
“I would be surprised if this is done annually, because it will cause turnover in the portfolios, and that comes at a cost,” he said. “And higher cost is something that Vanguard tends to steer away from.”
The target date fund market, which was introduced 21 years ago, is measured by Morningstar Inc. at more than $700 billion across 54 target date series.
Ms. White said target date funds, which let individuals allocate savings to a specific retirement year, are helping to keep investors in the most appropriate risk ranges.
“Our research has shown that target retirement funds have moved risk-taking to the middle, and away from the extremes of too conservative or too aggressive,” she said.
According to Ms. White, of the retirement plans in Vanguard record-kept funds, more than half of the individual participants are invested in target date funds. The upcoming institutional version comes with a stated investment minimum of $100 million at the plan sponsor level.