Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Comments

  • @TheShadow : Thanks for that news & please keep me (us) up to date if more news come forth. I didn't see a place to sign up , but would expect a ruling before this issue becomes a class action law suit.
    Seems to me you would be suing oneself ?!
    Go Badgers, Derf
  • would expect a ruling before this issue becomes a class action law suit

    The suit was filed as a class action lawsuit. The cited piece reads: "The plaintiffs ... seek compensation for the alleged harm on behalf of a class of similarly situated investors nationwide."

    What is the problem with that? This seems to be exactly the type of suit for which class actions were created - large number of plaintiffs, similarly situated, a common transaction, and not worth most people's time and money to sue on their own.

    Assuming the court finds that some duty was breached by Vanguard, calculating damages will be interesting, since tax liabilities would seem to be more a matter of when a taxpayer owes taxes (i.e. when a taxpayer recognizes gain) than if a taxpayer owes the taxes. It could be a question of time value of money, not added tax liability.

    The duty question: Vanguard has tax-managed funds. These were not promoted as such. Did Vanguard have any duty to consider tax implications?

    Tax recognition timing: a plaintiff might argue that the recognition of gain was not certain - the fund shares could be bequeathed or donated to charities. So the damages should be the full amount of taxes due. OTOH, these are funds marketed as retirement funds, i.e. funds expected to be sold down during retirement. Arguably while other dispositions are possible, they might be considered speculative while gradual disinvestment would be considered the norm.

    If it does come down to a question of timing (recognizing gain now rather than say, from age 65 to 95, then the damages might be just the time value of the taxes paid now rather than over those 30 years. Current discount rate (even with the 0.25% fed hike) is pretty low.

    Lowering the institutional series' minimum was a stupid thing for Vanguard to do, given that it was going to merge the institutional and retail series of funds a few months later. But stupid and negligent are not the same, and in any case, the tax bills would have come due sooner or later.

    See also
    https://www.thinkadvisor.com/2022/03/15/vanguard-hit-with-class-action-suit-over-target-date-fund-tax-bills/
  • Vanguard being a mutual company is owned by fundholders, not shareholders. So were a judgment awarded fundholders, somehow will pay. So thi

    Their statutory prospectii are very clear. Distributions may be made, and unless the shares are held in a deferred account, taxes will be owed by the fundholder. My reaction: "Duh!"

    I just do not see the merit here. if a fundholder didn't read the prospectus, its on them. if they read the prospectus and decided to invest anyway, its on them.

    Is the plaintiff class position "we have no responsibility to perform due diligence, and our fundamental IR-responsibility must be underwritten by other fundholders"??
  • I just do not see the merit here. if a fundholder didn't read the prospectus, its on them. if they read the prospectus and decided to invest anyway, its on them.
    Do you read every page in the prospectuses for your funds? Do you read the terms of service agreements for your search engines, social media accounts, and email in their entirety? Do you read the agreements to go into arbitration at your broker and all of their terms? This notion that vendors of products have no responsibility towards consumers simply because they have 300-page legal disclosures written in fine print buried somewhere on their web sites the user/consumer implicity and often unwittingly agreed to simply by clicking "Buy" I think needs to be addressed at somepoint by regulators.
  • msf
    edited March 17
    Their statutory prospectii are very clear. Distributions may be made

    Suppose a fund had short term shares and long term shares with the same cost basis. And suppose Vanguard chose to sell the short term shares instead of the long term shares to raise cash. That's something no prudent investor would do.

    I don't think there's any doubt that in such a situation Vanguard would have breached its fiduciary duty of care. The fact that shareholders are on notice that the tax liability on recognized gains is passed through to them does not relieve Vanguard of this fiduciary duty in all situations.

    https://www.law.cornell.edu/wex/duty_of_care
  • The real question is why did the heart beat trade not work This time around.

    https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/


  • msf
    edited March 18
    AFIAK (I'm not checking), none of the target date funds (or underlying funds, though that wouldn't matter) are index funds. Vanguard does not offer ETF class shares on non-index funds.
  • That’s a good point. Need to check if that’s the reason.
  • Thanks @Devo : If you reached your limit on articles , then try here :: https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985

    So with that read, should or could the "average" investor try to do the trade of MF's to appreciated stock while doing a redemption ? A step up in bias sounds good to me if the proceeds are to be passed on ! Granted the stock could go down in price before one gets to pass it on.
    Go Badgers, Derf
  • It would be hard to win a case against a fund just because of large CGs. There have been larger and more shocking CGs.

    But Vanguard used poor judgment in making disruptive changes just weeks ahead of the merger of 2 similar TDF series.

    I wish one result from this is a new requirement to preannounce mutual fund distributions just as stocks, ETFs, CEFs do. BTW, Vanguard did preannouce CG distributions for these TDF series in its huge list of yearend CG distributions.
  • I greatly appreciate preannouncements because they facilitate YE tax planning - how much gain to take this year (or whether to recognize losses), how much of an IRA to convert.

    But in terms of managing large distributions, the preannouncements are a double edged sword. I admit to playing the game (as described below) to the disadvantage of other shareholders when it benefits me to do so. (That happens very infrequently.) It's legal, but it isn't especially fair to other investors.

    Total distributions of the retail target date funds were estimated to be around 14%, depending on the fund.
    https://advisors.vanguard.com//iwe/pdf/taxcenter/FAFYEEST_122021.pdf

    If I had owned shares of a fund that had appreciated less than 14%, I would have sold the shares by the record date (so that I would not receive the distributions). Immediately after that (on the ex-date) I would have reestablished my position. Even if I recognized 12% in gain, I'd come out better than being handed a tax bill for a 14% distribution.

    This would hurt remaining investors (in taxable accounts). The same cap gains and income would still have to be distributed, but now divided into fewer shares (because I'd redeemed mine). That would increase the taxable distributions to others.

    If I'd had, say, a 16% unrealized gain, I wouldn't make this move. Otherwise I'd recognize a 16% gain when I could have recognized "just" 14% by staying put and taking the distributions.

    The fact that this maneuver was available to everyone may be another argument that Vanguard could make to limit damages, assuming it is found to have breached its fiduciary duty.
  • edited March 18
    @MSF One thing I think you may be missing is that when a fund makes such a large distribution, often, although not always, it has performed quite well and it may be time to reallocate one's portfolio into another asset class that has underperformed and is cheaper. This however may not apply to TDFs as they do the allocating for investors. Such a strategy as you described may add value in TDFs but in more traditional single asset funds could be just throwing money at an overvalued position for an extra 2%. I've often taken such distributions and put them somewhere else. It's rather interesting from a psychological perspective of an investor thinking about the manager's psychology. If the manager is selling stocks and realizing large gains in them, perhaps his/her portfolio isn't quite as attractive as it once was. There may of course be many reasons why he/she is selling the positions, but valuation is often one of them. A big distribution is almost a tacit admission by the manager in some cases I imagine that it's time for fund investors to move on. I wonder if anyone has ever done a study on how equity funds perform after they've made large distributions.
  • Well, large distributions may also be forced by significant outflows (a negative for the fund) and manager changes (just housecleaning to start fresh, at best neutral). So, portfolio outperforming is not the only reason for large distributions although that is common in good market years (but may also be in disastrous years). M* publishes Potential CG Exposures and for many funds that may remain forever, or not. Culprit here is constant inflows/outflows from mutual funds/OEFs.
  • edited March 18
    Agreed, but those other two situations--significant outflows or a new manager--aren't necessarily good reasons to add money to a fund when they make a distribution either. Both could be considered sell signs.
  • I try (less successfully than I'd like) not to let tax considerations drive my investment decisions. I agree with @LewisBaham to the extent that if one is executing such a maneuver, then one has a "free pass" to change allocations without (additional) tax consequences. A rare opportunity.

    Most of the time, if a fund has done well, one's shares have appreciated more than even the larger than normal distributions for the year. Then, one is not going to sell "around" the distribution. Still, if one wants to reallocate assets, one can do that with the sizeable distribution rather than reinvesting it. This is also a "free pass".

    Another opportunity to do a partial reallocation "for free" occurs when some but not all of the shares have appreciated less than the projected distribution. By identifying those specific shares to sell, one can execute the maneuver I described just for those shares. Except that instead of repurchasing the fund, one has a "free pass" to reallocate those proceeds.
  • Thanks @ Derf, I didn't even know there was an option for the average investor to redeem MF into appreciated shares. Can an average investor do this?


    -----
    Derf
    March 18 Flag
    Thanks @Devo : If you reached your limit on articles , then try here :: https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985

    So with that read, should or could the "average" investor try to do the trade of MF's to appreciated stock while doing a redemption ? A step up in bias sounds good to me if the proceeds are to be passed on ! Granted the stock could go down in price before one gets to pass it on.
  • I just do not see the merit here. if a fundholder didn't read the prospectus, its on them. if they read the prospectus and decided to invest anyway, its on them.
    Do you read every page in the prospectuses for your funds? Do you read the terms of service agreements for your search engines, social media accounts, and email in their entirety? Do you read the agreements to go into arbitration at your broker and all of their terms? This notion that vendors of products have no responsibility towards consumers simply because they have 300-page legal disclosures written in fine print buried somewhere on their web sites the user/consumer implicity and often unwittingly agreed to simply by clicking "Buy" I think needs to be addressed at somepoint by regulators.
    It sounds like your position is that investors themselves have NO responsibility, to be, well, responsible..
  • Why is it those who preach the mantra of “personal responsibility” rarely seem to care about corporate responsibility? It’s a two-sided transaction but one side always is dramatically more informed and powerful than the other and it’s not the consumer. One could say as soon as the gambler walks in the casino they’ve already lost. The house is armed with a truckload of legal information they’ve scripted themselves in some sort of disclosure that doesn’t rectify the inequality of the relationship simply by dumping it on the unschooled consumer. The consumer in general doesn’t have the legal background to understand fully what they’re committing to nor the economic wherewithal to fight the house in court, or, worse, arbitration even if they do.
  • +1 LB
  • edited March 20
    What Vanguard did here could be legal but inexcusable. It just reeks of incompetence and I think incompetence is not illegal on this planet but lack of duty to care is. Capital gains recognized by departing shareholders can be used by the fund to reduce fund level capital gains. Not too many funds employ this rule to reduce capital gain distributions to staying shareholders. Did Vanguard employ this rule to reduce capital gain distributions in this case?

    I hold some Vanguard index equity ETFs (and no OEFs) in my taxable accounts and the thought that they could sock me in the face at YE with cap gain distributions crosses my mind every year. This is more true for Vanguard ETFs because they are a class of the OEFs. Not trying to digress but wanted to convey that blindly outsourcing one's welfare to an institution has its costs and there are a lot of die hard Vanguard fund shareholders with blind faith in Vanguard.
  • Here's a good video explaining the lawsuit:


    and the actual complaint (courtesy of that video):
    https://www.classaction.org/media/verduce-et-al-v-vanguard-chester-funds-et-al.pdf

    What I was saying above about the actual damages not being as large as claimed is covered in the video starting about 17:15.

    I agree with the video that win or lose, this is a big PR problem for Vanguard. In essence because its defense will likely be in part that on balance, investors were helped - it's just that the institutions (401(k) plans) were helped at the expense of the little guys (retail investors).

    Though that framing isn't exactly objective because who invests in 401(k) plans? Not just CEOs but line workers (and CEOs have private plans that are much more lucrative). Still, it will be difficult for Vanguard to manage what this looks like.

    The complaint seems to be asserting that Vanguard (or any fiduciary) cannot disadvantage anyone even if the overall effect is positive. IMHO that's a losing argument.

    Suppose the situation were somewhat reversed, if instead of supposedly helping the institutions at the expense of the little guy, Vanguard had made a change that significantly helped the little guy while dinging the institutions. Would people be complaining? Yet the same argument would apply.
Sign In or Register to comment.