Vanguard goes against the grain by shuttering alternatives fund

A bit of housekeeping at Vanguard has resulted in the demise of two actively managed mutual funds.

By midyear, the asset management firm's $97.6 million Alternative Strategies Investor (VASFX) will be liquidated, and the $1.2 billion Managed Allocation (VPGDX) will have been merged with the $18.9 billion LifeStrategy Moderate Growth (VSMGX).

The liquidation, the first to occur at Vanguard since November 2020. is interesting because it goes against the grain of an asset management industry that's leaning into alternative strategies following last year's weak performance by both stocks and bonds.

Vanguard’s Alternative Strategies fund is down about half a percentage point so far this year, but it gained 2.2% last year when the classic portfolio of 60% stocks and 40% bonds fell by 14.3%.

“The timing of the closure of the alternatives fund is interesting, because across the industry these strategies are starting to gain a broader following after 2022, when the stock and bond markets fell at the same time,” said Todd Rosenbluth, director of research at VettaFi.

However, the fund has been around for more than seven years and hasn’t reached $100 million yet.

“Closing a fund where there is limited interest is prudent as it will allow the firm to reallocate resources to meet advisors where they want to invest,” Rosenbluth said.

Vanguard declined to comment beyond a press release that mentioned meeting the “long-term needs of Vanguard’s diverse investor base.”

But Jeff DeMaso, a devout Vanguard watcher who's director of research at Adviser Investments, views the closing of the alternatives fund as a bust for Vanguard.

He described the Alternative Strategies fund as “a loser” that might have gotten too fancy for its own good by “blending together several different hedge fund-like strategies.”

“If it sounds complicated and confusing, it is,” DeMaso said. “While it mixed together some fancy sounding strategies, Vanguard also had some very hedge fund-like targets for this fund, attempting to generate positive returns regardless of what the stock or bond markets were doing. And they expected the fund to be less volatile than the stock market to boot. A tall order, and an appealing one on its face. Of course, your money market fund meets those criteria too.”

Regarding merging the funds, which last happened at Vanguard in February 2021, DeMaso said Vanguard is finally putting to rest its effort to reinvent the college endowment model beginning in 2008 with three managed payout funds.

Through various iterations, the result was Managed Allocation in 2020, a portfolio designed to hold 60% stocks, 20% bonds and 20% alternatives, including the soon-to-be liquidated Alternative Strategies fund.

By DeMaso’s analysis, the inclusion of alternatives has given Managed Allocation a slight performance edge over the LifeStrategy Moderate Growth fund it is being merged with.

“But if we look over the long run, since Managed Allocation’s inception, well, the two funds have ended up in pretty much the same place,” he said.