Critics: Vanguard tardy in firing AllianceBernstein

U.S. Growth underperformed during 9-year subadvisory relationship

Nov 7, 2010 @ 12:01 am

By Jessica Toonkel

The Vanguard Group Inc.'s decision last month to fire AllianceBernstein LP as co-subadviser of its U.S. Growth Fund after nine years has caused a number of fund observers, including Vanguard founder John Bogle, to question why it took so long.

The move came after the fund underperformed its category for the past one-, three-, and five-year periods during AllianceBernstein's tenure, and for the 10- and 15-year periods encompassing that tenure, according to Morningstar Inc.

Vanguard said last month that it had tapped Delaware Investments and Wellington Management Co. LLP to replace AllianceBernstein. Each manager, along with holdover William Blair & Co. LLC, will oversee one-third of the portfolio.

“I have no idea why it took them so long,” Mr. Bogle said. “I am not sure who there said, "Let's stick with Alliance.'”


Vanguard's “delayed response in firing Alliance may be the worst case of fund stewardship ever seen at Vanguard,” Dan Wiener, editor of the Independent Adviser for Vanguard Investors, wrote in the newsletter. “Where were Vanguard's directors?”

A lot of behind-the-scenes negotiations go on between fund managers and their subadvisers, so it is hard to say what happened in this situation, said Jeff Tjornehoj, a research manager at Lipper Inc.

“I don't think this was a case of Vanguard saying, "Let's just give them opportunity after opportunity,' but Alliance managed other products for Vanguard, so they had to really assess the situation,” he said.

Vanguard made a number of changes to the management of the fund over the years, John Woerth, a Vanguard spokesman, wrote in an e-mail.

“Most notably, [Blair] was added as a co-adviser in 2004 and the Alliance team was reconstituted in 2008,” he wrote. “As such, Vanguard has taken steps in the interim, and it is misleading to suggest otherwise.”

AllianceBernstein will continue as co-adviser on Vanguard's Global Equity, International Value and Windsor funds, said John Meyers, a spokesman at AllianceBernstein.

Some advisers said that Vanguard's unwillingness to fire Alliance even though it was clear that the firm wasn't turning around its performance might be an indication that Vanguard should stick to passive management.

“Why is this firm in active management at all?” asked Doug Flynn, co-founder of Flynn Zito Capital Management LLC, which has $265 million in assets under management. “And if they are going to do active management, I need to understand what kind of system and process they have in place that requires you to take this long to fire an underperforming manager.”

Vanguard thinks that its “patient, long-term approach works exceedingly well” in the active-management arena, Mr. Woerth wrote in an e-mail. “Over the past 10 years through June 30, 17 of Vanguard's 22 actively managed stock funds have outperformed their respective benchmarks, and 19 of 22 have outperformed their peer group averages.”

Mr. Meyers, the AllianceBernstein spokesman, declined to comment further on Vanguard's decision.

Although the U.S. Growth Fund “has been a long-running disappointment,” the fact that Vanguard took its time in dismissing AllianceBernstein speaks well of how the firm works with its subadvisers, said Morningstar Inc. research director Russel Kinnel.

“The fact that they are patient allows them to attract long-term subadvisers,” he said.

Vanguard couldn't fire AllianceBernstein until it had a good replacement in line, Mr. Kinnel said.

“If you can't engineer a significant upgrade, then it's not worth doing,” he said.

In addition, Mr. Wiener also questioned in his newsletter why Vanguard wasn't more forthcoming in July 2008 about how the U.S. Growth Fund had changed its strategy when James G. Reilly, an executive vice president at AllianceBernstein, and Scott Wallace, a senior vice president, took over portfolio management duties for AllianceBernstein's portion of the fund. They succeeded Alan E. Levi, who retired.

At that point, the AllianceBernstein portion of the fund changed strategies from “disciplined growth” to “U.S. strategic growth,” according to Mr. Wiener.

“Despite the fact that the strategy AllianceBernstein used for managing U.S. Growth's assets was changed, Vanguard did not communicate this to shareholders,” he wrote.

Vanguard disputes that there was any change of strategy in the fund.

“The fund was and remains one that invests primarily in large- capitalization stocks of U.S. companies considered to have above-average earnings growth potential and reasonable stock prices, in comparison with expected earnings,” Mr. Woerth wrote .

“Yes, there were some changes in the portfolio's composition resulting from the transition, as would be expected. However, the fundamental characteristics of the fund remained largely unchanged,” Mr. Woerth wrote.

E-mail Jessica Toonkel at


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