Vanguard Group to Merge Insured, Uninsured Tax-Exempt Funds

As a result of the credit crisis, Valley Forge, Pa.-based Vanguard Group yesterday said it will merge its $3.2 billion Vanguard Insured Long-Term Tax-Exempt Fund into its $2.8 billion Vanguard Long-Term Tax-Exempt Fund effective Dec. 12, 2008.

"The municipal bond market has changed to a point where insured bonds provide little, if any, additional benefit over high-quality uninsured credits," Gus Sauter, Vanguard's chief investment officer, said in the release posted on the firm's Web site yesterday. "We concluded that a fund focused solely on insured bonds no longer provides tangible benefits. Shareholders will be better served by merging the two portfolios to create a single, well-diversified, high-quality fund."

The insured long-term fund, which is the only long-term fund at Vanguard focusing on insured bonds, is closed to new accounts as a result of the planned merger. According to a spokeswoman for the firm, the merger is a permanent change for the two national funds. She said the firm does not anticipate any changes to its state tax-exempt funds.

The decision for the merger came after the credit quality of six of the major bond insurers deteriorated - and three were stripped of their triple-A ratings - after they suffered repeated downgrades by credit rating agencies earlier this year, according to Vanugard's release.

The deterioration led to subsequent downgrades on many insured municipal bonds and ultimately removed the advantage of owning insured bonds, as they began trading on the underlying ratings of the municipalities that issued them - and similar to how uninsured bonds traded, the firm said.

Chris Alwine, head of Vanguard's municipal group, said the firm's future participation in insured paper depends on the valuation and health of the insurers.

"We're not ruling out insured paper, but we are not willing to pay up for insurance. If we are buying insured paper we want to make sure that we are buying it as if it's unenhanced," he said. "We want to buy it at a level that is reflective of the underlying issuers' credit."

John Carbone, who currently oversees the insured fund, will continue to manage three other municipal bond funds at Vanguard once the merger occurs. Reid Smith will remain as portfolio manager for the Vanguard Long-Term Tax-Exempt Fund

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