A Word on Vanguard Money Market Funds

In an encouraging sign after the news of the Reserve Primary Fund breaking the buck yesterday, Vanguard Funds came clean today on the state of their money market funds. Their release dated today on their website says:

The recent bankruptcy filing by Lehman Brothers Holdings Inc. and widespread turbulence in the financial markets have prompted a number of questions about the impact on Vanguard funds, including money market funds.

Vanguard is confident in the stability of its money market funds, all of which are managed with the objective of maintaining a stable net asset value of $1 a share. Vanguard continues to manage its money market funds very conservatively and with extreme prudence, focusing on high quality, short-term money market instruments.

All of the investments in our money market funds are closely examined by our Fixed Income Group's highly skilled and experienced credit analysts. Analysts assess the quality of each underlying issuer through in-depth credit analysis and do not rely on agency credit ratings.

Our largest money market fund is Vanguard Prime Money Market Fund, which currently holds more than half of its assets in U.S. Treasury and federal agency securities. In addition, Prime Money Market Fund has no exposure to money market instruments issued by securities dealers, including Lehman Brothers. It also has no exposure to securities of AIG, the insurance concern that is being supported by loans from the federal government.

Holdings of Vanguard Prime Money Market Fund (as of 8/31/2008)
U.S. Treasury: 36%
U.S. Agency: 17%
Certificates of deposit: 32%
High-quality commercial paper: 14%
Repurchase agreements: 1%

PIMCO, Vanguard Funds Hit By Lehman Bankruptcy

John Glover of Bloomberg News reports: "Pimco, Vanguard Are Biggest Lehman Bond Fund Losers."

Pimco Advisors LP, Vanguard Group Inc. and Franklin Advisers Inc. are among investment companies that may face losses of at least $86 billion stemming from the collapse of Lehman Brothers Holdings Inc., the biggest bankruptcy in history.

"Disaster for Public Confidence"

"The losses look set to be widespread, hurting the public through their mutual and pension funds,'' said Ciaran O'Hagan, a credit strategist at Societe Generale SA in Paris. ``It's clearly a disaster for public confidence.''

Pimco holds Lehman bonds in at least 12 of its funds, including the $134 billion Total Return Fund. Bill Gross, manager of the fund and co-chief investment officer of Pimco, was buying Lehman bonds as recently as June, Bloomberg data show.

...

While Gross may have lost on Lehman investments, he gained from those in Fannie Mae and Freddie Mac. His Total Return Fund made a $1.7 billion gain after the U.S. government seized control of the two mortgage-finance companies, Bloomberg data show. The fund's assets rose 1.3 percent to more than $134 billion on Sept. 8, according to Bloomberg. It has returned 4.19 percent this year, beating 98 percent of similar funds, Bloomberg data show.

Vanguard holds Lehman bonds among the $450 billion of fixed income it manages, spokesman John Woerth said. An outside spokeswoman for Pimco in London, who asked not to be named, said the company had no immediate comment, Lisa Gallegos, a spokeswoman for Franklin in San Mateo, California, wasn't immediately available.

AXA, Fidelity and Legg Mason have not been spared on the equity side either:

Axa SA, Europe's second-biggest insurer, and unnamed affiliates, own 7.25 percent of Lehman's equity, according to the filing. Clearbridge Advisers LLC, the asset manager that Baltimore-based Legg Mason Inc. acquired from Citigroup Inc. in 2005, held 6.33 percent, according to the filing. Boston-based FMR LLC, the parent of Fidelity, the world's largest mutual fund company, held 5.9 percent, the filing said.

Vanguard Managers Invested in Web Gambling, Suit Says

Andrew Harris of Bloomberg News is reporting, "Vanguard Managers Invested in Web Gambling, Suit Says."

Executives of Vanguard Group Inc., the second-biggest U.S. manager of stock and bond mutual funds, illegally invested client assets in companies running Internet gambling businesses banned in the U.S., according to a lawsuit.

Chief Investment Officer George Sauter, portfolio manager Duane Kelly and eight trustees violated U.S. racketeering laws and breached their fiduciary duties to investors by acquiring stock in the Web-based businesses, investors in two Vanguard- managed funds said in a complaint filed today in U.S. District Court in New York.

``Defendants caused the funds to become owners of illegal gambling businesses,'' according to the complaint. The plaintiffs seek class-action, or group, status on behalf of all similarly situated investors, plus unspecified compensatory and punitive damages.

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The case is McBrearty v. The Vanguard Group, 08cv7650, U.S. District Court, Southern District of New York (Manhattan).

Business Week - 2008 Retirement Guide

Business Week's 2008 Retirement Guide is out this week. As expected from a magazine of this stature, it was fairly well put together. The tone of the headlines seems to reflect the dour mood prevailing in the financial economy, and in some ways a tad alarmist, starting right from the headlined article.

"Retirement Strategies for Tough Times"

"Will You Outlive Your Money?"

"How to Enjoy a Scam-Free Retirement"

and one chock full of cautionary tales:

"Ruined by 401(k) Predators"

"Will You Outlive Your Money" visits the familiar topic which we have covered before in "WSJ Report - How to Bulletproof Your Nest Egg." Notable by their absence, are any references to the new payout mutual funds developed by Vanguard and Fidelity. These funds offer the retirement-stage investor the ability to cheaply obtain a regular income stream without paying the higher fees typically associated with retirement annuity products.

Vanguard's products called "Managed Payout Funds" are based on a given investor's appetite for risk, whereas, Fidelity's product called "Income Replacement Funds" are similarly structured with the biggest difference being their emphasis on "target dates" kind of like target date date portfolios in reverse.

One great article mentioned in the 2008 report is, "Target-Date Funds Hit Their Stride." Some interesting factoids on target date funds:

• Assets collectively hit $204.2 billion at the end of May 2008, as compared to $116 billion last year
• Funds managing for a 2020 retirement date snagged the largest share of target date assets
• Exposure to international equities increased from 7% in a typical fund in 2005 up to 17% in 2007
• Exposure in REITs has also increased with AllianceBernstein target date funds allocating up to 10% of their assets in this asset class
• Hedging strategies are also turning up in this class of funds, with TIPs and commodities (the "usual" hedges), along with Bank of America's funds considering some exposure to Asian currencies, nuclear power and water.