Author Topic: could Vanguard fold?  (Read 6274 times)

solon

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could Vanguard fold?
« on: August 21, 2014, 03:27:18 PM »
What happens if Vanguard goes out of business? Does Vanguard (the company) have shareholders? What would be the remedies for people who own shares of their funds?

tmd012

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Re: could Vanguard fold?
« Reply #1 on: August 21, 2014, 03:42:05 PM »
Check out the post 3 down from yours talking about how Vanguard now has $3 trillion in assets.  I think you can worry about something else.

DollarsAndDissonance

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Re: could Vanguard fold?
« Reply #2 on: August 21, 2014, 03:42:58 PM »
1. Could Vanguard fold?
Yes, any investment management company could fold due to poor management or unforeseen market conditions.  But it's very unlikely that Vanguard would do so even in disastrous market conditions, as it is not involved in the higher-risk investment banking or underwriting functions that many banks are.  It's certainly not unheard of for a manager to go under (e.g., Lehman Brothers).

2. What happens if Vanguard goes out of business?  What would be the remedies for people who own shares of their funds?
Vanguard is actually owned by the funds it offers.  It's a separate legal entity from the funds in which you invest, so you would still own the fund and the securities held by the fund in the event that the Vanguard management company folded.  Fund holders have a variety of other protections, as well, including securities being held in a custodial account, managed by a separate trust or bank, and insurance requirement for funds.  Probably the most likely scenario is that the fund would contract with a different bank or fund manager to offer the mutual funds in which you invest.

DollarsAndDissonance

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Re: could Vanguard fold?
« Reply #3 on: August 21, 2014, 03:46:22 PM »
Check out the post 3 down from yours talking about how Vanguard now has $3 trillion in assets.  I think you can worry about something else.

For what it's worth, Lehman Brothers had $600 billion in assets when it filed for Chapter 11, and AIG had a similar amount when it was bailed out.  Assets under management don't necessarily mean financial stability, though Vanguard is set up differently and not dealing with the same level of investment risk.

solon

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Re: could Vanguard fold?
« Reply #4 on: August 21, 2014, 04:02:22 PM »
Check out the post 3 down from yours talking about how Vanguard now has $3 trillion in assets.  I think you can worry about something else.

Yeah, that's what got me started thinking about this. $3T is a lot of money. You can't steer a ship that big.

List of bad things:
stock market crash
housing bubble
internet bubble
sovereign debt default

We don't need to add "Vanguard bankruptcy" to that list

AH013

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Re: could Vanguard fold?
« Reply #5 on: August 21, 2014, 04:07:37 PM »
SIPC.  The securities you own (by way of the mutual funds) are isolated from Vanguard's corporate funds.  In the event Vanguard collapsed, SIPC steps in and ensures each investor is given their proper holdings (stocks, bonds, cash, whatever) that they legally own.

Per FINRA regulations, they are not allowed to commingle your securities with their securities, nor lend them to anyone else (unless you bought stock on margin or sold stock short, then they can lend out only an amount appropriate for how much you borrowed -- not your entire account).

MF Global did violate this FINRA requirement (no idea why Jon Corzine didn't land in jail for life -- guess he played the "I'm just some idiot they pay $8M a year to look pretty and not actually know what goes on here" card really well), but SIPC stepped in and ensured customers were made 100% whole (except those that sold their interests to vulture capitalist for pennies on the dollar -- but they screwed themselves).

So if Vanguard collapsed, and they ceased activities, you would likely end up with a large assortment of various stocks & bonds based on the funds you owned -- assuming a Fidelity, BlackRock or similar didn't buy out their business and roll their mutual fund assets into similar mutual funds that they ran, leaving you with shares of their mutual funds.

Vanguard also has a unique position in the industry as customer-owned, so its shareholders are their fund investors, so they have no real motive to screw customers or take large risks to appease shareholders desires for quick profit.

tomsang

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Re: could Vanguard fold?
« Reply #6 on: August 21, 2014, 04:12:30 PM »
Vanguard is Owned by the funds themselves. They don't have shareholders demanding greater and greater returns. They are not set up for profit. They have a ton of equity. With that being said, if they fail that only means that we don't get a low cost operation fees. Our funds are not at risk for their business failures.


gimp

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Re: could Vanguard fold?
« Reply #7 on: August 21, 2014, 05:39:11 PM »
Corzine knew. The look on his face two months before it became public said everything. "I done fucked up." I have no idea why someone with such a pedigree and history would ever stoop to one of the most obvious, most clear-cut schemes. They teach you that on day one: no commingling of funds, not a cent! I suspect he made bets that didn't pay off and thought he could hide what he thought would be a brief shoftfall... anyways, intelligent idiot.

solon

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Re: could Vanguard fold?
« Reply #8 on: August 22, 2014, 10:06:46 AM »
OK, hypothetically, how big could a single fund get? Take the VFINX. The biggest it could get is owning all the stock of the S&P 500. But there are laws that limit a single fund to 5% of the stock of any company, right? That means the biggest VFINX could get is 5% of the S&P 500. What if it actually got that big? Vanguard would just start a new fund? How long could it keep starting new funds? What if the S&P 500 was owned entirely by 20 different Vanguard funds?

tomsang

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Re: could Vanguard fold?
« Reply #9 on: August 22, 2014, 10:12:29 AM »
OK, hypothetically, how big could a single fund get? Take the VFINX. The biggest it could get is owning all the stock of the S&P 500. But there are laws that limit a single fund to 5% of the stock of any company, right? That means the biggest VFINX could get is 5% of the S&P 500. What if it actually got that big? Vanguard would just start a new fund? How long could it keep starting new funds? What if the S&P 500 was owned entirely by 20 different Vanguard funds?

A fund could own 100% of a company.  The 5% rules are in place to make it public that you are purchasing shares in a company.  Berkshire owns like 10% of Coca Cola and 100% of lots of companies.

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solon

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Re: could Vanguard fold?
« Reply #12 on: August 22, 2014, 10:52:49 AM »
What does "client-owned" mean? When I look at a fund's portfolio, I don't see any Vanguard shares in there. How much of Vanguard does VFINX, for example, own?

matchewed

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Re: could Vanguard fold?
« Reply #13 on: August 22, 2014, 11:01:43 AM »
Vanguard is not a publicly traded company so the answer is 0. Nothing owns Vanguard but the people who use it to invest in index funds.

solon

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Re: could Vanguard fold?
« Reply #14 on: August 22, 2014, 11:25:35 AM »
Vanguard is not a publicly traded company so the answer is 0. Nothing owns Vanguard but the people who use it to invest in index funds.

The links above state that Vanguard is "client-owned" - and the phrase is clarified to mean "the company is owned by the funds".  How does this work? It seems to me if I own shares of a fund, I own what the fund owns, but nothing else?

matchewed

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Re: could Vanguard fold?
« Reply #15 on: August 22, 2014, 11:35:22 AM »
https://about.vanguard.com/what-sets-vanguard-apart/why-ownership-matters/

Since it is "client owned" that means there is no stock holder of Vanguard company shares to please with Vanguard stock appreciation or Vanguard dividends.

If I'm a fund manager for investment management company X and X is publicly traded I will have some conflicts. I have to do what is best for my clients and my shareholders. And sometimes actions may not help both, or may harm one but not the other. Being client owned means there is no shareholder to please or rather that the client is the shareholder but you still don't get stock. You as the customer are the only vested interest the company has. More reading below.

http://www.bogleheads.org/forum/viewtopic.php?t=16305
http://blogs.barrons.com/focusonfunds/2013/05/21/vanguards-owners-are-more-important-than-you-think/

Jack

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Re: could Vanguard fold?
« Reply #16 on: August 22, 2014, 12:49:50 PM »
Vanguard is not a publicly traded company so the answer is 0. Nothing owns Vanguard but the people who use it to invest in index funds.

The links above state that Vanguard is "client-owned" - and the phrase is clarified to mean "the company is owned by the funds".  How does this work? It seems to me if I own shares of a fund, I own what the fund owns, but nothing else?

I think you can consider it like this: when you buy shares in VTSAX, you own fractional shares in the companies VTSAX owns and an "implicit" share in "the management company known as Vanguard". Since it operates at-cost, "the management company known as Vanguard" is worth approximately $0.

marty998

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Re: could Vanguard fold?
« Reply #17 on: August 22, 2014, 09:37:53 PM »
Sounds a bit like a Mutual or a credit union down here, where any excess profits go back into cheaper products for the benefit of members.