Two New Vanguard Funds Start Taking Pledges - TheStreet

Two new


funds, a value fund and an inflation-protected bond fund, will start a four-week subscription period today.

The $560 billion money manager is primarily known for its index-funds like Vanguard

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500 Index, but these new offerings will be actively managed. It will collect pledges for launch-day shares of

Vanguard U.S. Value


Vanguard Inflation-Protected Securities

from June 5 through June 29. At that point, the firm will collect pledged assets and build each no-load fund's portfolio. Both funds could intrigue cautious investors.

The new value fund will follow Vanguard's typical approach to active management, where it designs a fund and hires a subadviser -- in this case Boston-based $20 billion

Grantham Mayo Van Otterloo

(GMO). The firm will use a quantitative-management style to identify stocks within the

Russell 3000

, an index of the 3,000 largest U.S. stocks that appear to be undervalued. The fund will focus on stocks that look cheap, according to three different yardsticks: stock price to book value, cash flow and intrinsic worth, according to a company statement.


previewed U.S. Value on March 2.

The Inflation-Protected Securities fund, a bond offering, will invest primarily in inflation-indexed bonds, namely TIPS, or Treasury inflation-protected securities. Like most bonds, TIPS pay a fixed interest rate, but the principal investment is indexed to match inflation. Investors are assured of getting at least the face value of these bonds if held to maturity -- so they can be a good hedge against rising inflation. Vanguard's fixed-income investment group, which runs 45 bond portfolios with some $140 billion in assets, will skipper the new fund.


previewed Inflation-Protected Securities on March 22.

As you might imagine, cheapskates will take a long look at these funds. The value fund's annual expenses are expected to be 0.53%, compared with 1.38% for its average peer, according to



The new bond fund's annual expenses are expected to be 0.25%. The average taxable bond fund's expenses are more than 1%, according to Morningstar.

Observers are relatively bullish on both funds' prospects, although neither will commence operations until the end of the month.

"GMO has a good record in running money for institutions. Vanguard typically does a really good job in picking subadvisers for their active funds," says Morningstar analyst Scott Cooley.

And Vanguard's expertise at running solid bond funds with low expenses should bode well for those investors who are skittish about inflation.

"The TIPS fund plays right into Vanguard's strength as a low-cost bond fund manager. I'd imagine they'll have one of the best TIPS funds out there," says Dan Wiener, editor of the

Independent Adviser for Vanguard Investors


Investors haven't been clamoring for value or bond funds lately, but that doesn't concern Vanguard.

"It almost appears to be a contrarian move, but we don't typically bring out new funds in areas that are hot," says Vanguard spokesman Brian Mattes.

Each could provide a port if the market's stormy weather continues. Through June 1, the average value fund is up 0.9% since Jan. 1, beating the

S&P 500

since Jan. 1, and

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PIMCO Real Return Bond, an institution fund focusing on inflation-protected securities, is also beating the index, up 5.9% since Jan. 1.

In terms of the subscription offering, investors should keep in mind that there isn't a huge advantage to buying a fund on its opening day -- unlike stocks that sometimes rocket to all-time highs right out of the gate. Some

allege that the launch tactic doesn't help investors much, but can help a fund company reduce the amount of seed capital needed to launch a fund.

"I've analyzed it

subscription offers in the past and no one's been able to explain to me how they benefit the consumer," says Andrew Guillette, an analyst with Boston-based fund consultant

Cerulli Associates


Vanguard and others say that criticism is misguided. The firm points out that it doesn't have capital of its own to launch a fund.

"Vanguard doesn't use seed capital because of our mutual ownership structure. We're owned by the shareholders of our funds," says Mattes.

Wiener, an independent Vanguard watcher and critic, agrees.

"I think that's completely ridiculous. The money Vanguard collects doesn't benefit Vanguard. The only benefit is that when the fund launches, they have enough money to avoid paying an arm and a leg to build the portfolio," he says.