Mutual Funds; The Vanguard Approach to Taxes - New York Times

Mutual Funds; The Vanguard Approach to Taxes
Published: June 26, 1994


FRENZIED competition among mutual fund companies for investors has led to some gimmicky marketing, a trend the Vanguard Group, known for its plain-vanilla approach to investing, has long resisted. But now, it seems, the company is succumbing.
Taxes is the latest buzzword among funds, and Vanguard is jumping in with a series of funds in July that are intended to reduce shareholders' taxes. ...

To reduce realized capital gains even more, each portfolio will select shares of securities with the highest "cost basis" when their holdings are sold. The cost basis, roughly the price paid for shares, is subtracted from sales proceeds to figure taxable gains, so selling high-basis shares creates the smallest gain.

But since index funds are low turnover by design, how much can selective selling add to the return? John C. Bogle, Vanguard's chairman and chief executive, said he was "hesitant to say" because of Securities and Exchange rules on promoting funds that are still in registration. But he did say that "when you reduce taxes, the formula shifts dramatically" on how much investors make after taxes are paid.

It's hard to see how there can be a significant difference because of the buy-and-hold approach used by index funds in general. Turnover in Vanguard's Index 500 fund last year, for instance, was 6 percent, compared with 75.5 percent for the average diversified domestic equity fund, according to Morningstar Inc., fund researchers. But the Vanguard figure drops to a mere 2 percent when redemptions in which shareholders receive stock instead of cash are excluded.

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