Vanguard Asset Allocation fund now 10% cash...

[Lancelot]

I'm probably the last to notice this but Vanguard's Asset Allocation fund is now 10% in short term reserves, which I think is cash. I check AAF's allocation occasionally and it has been 100% equities for quite a while.

Do the Vanguard computers foresee a correction on the horizon?!?

Lance

https://flagship.vanguard.com/VGApp/hnw/FundsHoldings?FundId=0078&FundIntExt=INT

 

[BUM]

News to me. I used to keep the company's SEPP contributions in this fund. It was (and M* still lists it as) 20% cash.

They bought something. A higher cash position can cushion a downturn. But 10%??

 

[yakers]

I like this fund and have my Roth IRA in it. I respect the model they use. For me the fund is an S&P 500 substitute and tracks that index pretty well. Slightly better return with slightly less risk. I am not concerned that they are going to cash, I seem to be collecting cash in the credit union that I can not find anything better to invest it in.

 

[d]

it has been 100% equities for quite a while.

... the shift tells us that some smarter-than-me folks at Wellington Capital Management think it might be wise to raise some cash.

The fund allocates its assets among common stocks, bonds, and money market instruments in proportions consistent with the advisor’s evaluation of their expected returns and risks. These proportions are changed from time to time as return expectations shift.

while they're not infallible, i'd not dismiss their action here.

 

[jIMOh]

cash is needed for redemptions and other reasons. Maybe they are expecting 10% of NAV to be redeemed?

 

[Lancelot]

... the shift tells us that some smarter-than-me folks at Wellington Capital Management think it might be wise to raise some cash.while they're not infallible, i'd not dismiss their action here.

Yes, I was thinking that perhaps the computer model was taking some money off the table.

Time will tell

 

[Brat]

My core funds are DODBX and OAKBX. I was surprised at how little they moved today. Maybe they too are taking some profits.

 

[chinaco]

I have not looked at AA and how the portfolio is constructed. If they make stock picks... they may have sold some specific holding that have had a good run so far during this business cycle and looking to redeploy into equity that will fair well in the next stage of the biz cycle. As opposed to trim across the board. Likewise, they could have trimmed some losers that are still looking bad. Anyone looked to see exactly what was trimmed from the equity holdings?

 

[WilliamG]

Just looked at Morningstar and they have 18.3% cash. Vanguard's 10% report is dated March 31. Perhaps Morningstar is more current and they have added to cash position in April?

 

[ats5g]

fyi - Morningstar's #'s are from 12/31/06.

Vanguard's numbers are as of 3/31/07.

No one, not even Morningstar, except the fund company perhaps, knows what a fund's holdings are until the fund files a quarterly, semi-annual, or annual report with the SEC.

VAAPX does not pick stocks. The stocks it invests in almost exactly the same as the S&P 500. See a comparison of VAAPX's portfolio versus that of VFINX.

Here's the Investment Strategy from Vanguard's website:

The fund allocates its assets among common stocks, bonds, and money market instruments in proportions consistent with the advisor’s evaluation of their expected returns and risks. These proportions are changed from time to time as return expectations shift. The fund may invest up to 100% of its assets in any one of the three asset classes.

and from VAAPX's prospectus:

Investment Objective
The Fund seeks to maximize long-term total return (share price plus income) while incurring less stock market risk than a fund made up entirely of stocks.

[page 1]

The Fund will typically hold a diverse group of stocks intended to parallel the performance of the S&P 500 Index, which is dominated by large-capitalization stocks. Stocks are evaluated using a “dividend discount” model, which provides an estimate of the total return of the S&P 500 Index based on the expected earnings of each company in the Index.

[page 6]

The Fund will typically invest its bond allocation in a pool of long-term U.S. Treasury bonds, which usually mature in 10 to 30 years. It may also hold other “full faith and credit” obligations of the U.S. government. Therefore, the Fund’s credit risk, which is the chance that a bond issuer will fail to pay interest and principal in a timely manner, should be negligible...

The advisor evaluates the attractiveness of a potential bond investment based on its current yield to maturity, which is an estimate of total return that considers a bond’s purchase price, redemption value, time to maturity, yield, and time between interest payments.

[page 7]

Security Selection
Mellon Capital Management Corporation (Mellon Capital), advisor to the Fund, selects securities for the Fund based on asset allocation decisions, rather than decisions about the attractiveness of individual stocks or bonds. Specifically, the advisor tries to determine the mix of common stocks, bonds, and money market instruments (cash investments) that offers the best combination of potential return and risk. The aim is to maximize the long-term total return of the Fund. At any given time, the advisor may allocate all, a portion, or none of the Fund’s assets to large-capitalization U.S. stocks, to long-term U.S. Treasury bonds, or to money market instruments...

For the Fund’s stock allocation, the advisor can use a diversified portfolio of stocks selected to parallel the performance of the S&P 500 Index, or it can use S&P 500 stock index futures. For the Fund’s bond allocation, the advisor can use long-term (10- to 30-year maturities) U.S. Treasury bonds (or other “full faith and credit” obligations of the U.S. government), or it can use U.S. Treasury bond futures. The
Fund’s cash investments may include a variety of money market instruments, including U.S. Treasury bills, government agency securities, high-quality commercial paper, and certificates of deposit.

The advisor uses a computer model to estimate the return and the risk of each asset class and then implements shifts in allocations in a disciplined manner. The advisor believes that, within the fluctuations of the financial markets, there are occasional brief periods in which the market values of the asset classes do not reflect their true value. The advisor attempts to capitalize on these perceived imbalances by changing
the mix of the Fund’s holdings in the three asset classes. There are no limitations on the amount of the Fund’s assets that may be allocated to stocks, bonds, or money market instruments; the advisor can invest up to 100% of the Fund’s assets in any one of the three asset classes.

[page 8-9]

Other Investment Policies and Risks
Besides investing in common stocks, bonds, and money market instruments, the Fund may make other kinds of investments to achieve its objective.

The Fund may invest, to a limited extent, in foreign securities.

The Fund may invest in derivatives. In general, derivatives may involve risks different from, and possibly greater than, those of the Fund’s other investments.

Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund’s derivative investments may include stock futures and options contracts. Losses (or gains) involving futures can sometimes be substantial—in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. The Fund will not use stock futures and options contracts or other derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Under normal circumstances, the market value of these contracts and options may represent up to 50% of the Fund’s assets. (Under unusual circumstances, the Fund may hold futures equal in value to 100% of its assets.)

The reasons for which the Fund may invest in futures and options include:

• To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks or bonds.
• To reduce the Fund’s transaction costs or add value when these instruments are
favorably priced.
• To use as an investment tool when reallocating assets among stocks, bonds, and money market instruments. For example, the advisor may wish to reallocate 10% of the Fund’s assets from stocks to bonds. To implement this change rapidly and with low transaction costs, the advisor may sell stock index futures and purchase bond index futures.

[page 9-10]

- Alec

 

[Lancelot]

Yes, the Vanguard numbers were as of March 31. As I understand it, Vanguard updates each funds "Holdings" information once a month.

I will be interested to see the Asset Allocation fund's holdings on April 30

 

[macdaddy]

I've been waiting for FFIDX to slump before putting more $ in. Until then, I'm in cash too...

 

[Siv]

Well, for sure some correction is going on at the moment,
Nikkei - 1.67%
shanghai - 5.84% and counting...fuih
Singapore - 2.26% and counting

the rest is following suit....

 

[Lancelot]

Well, for sure some correction is going on at the moment,
Nikkei - 1.67%
shanghai - 5.84% and counting...fuih
Singapore - 2.26% and counting

the rest is following suit....

Perhaps VAAPX's model automatically shifts some funds to bonds/cash as the market reaches new highs. About a correction, time will tell. I know the market goes up and I know it goes down.

I just don't know when :

Lance

 

[BUM]

Until then, I'm in cash too...

Me too macdaddy. I took the opportunity to sell off most of my putz stocks (not LNG or EGLE ).

Not sure if I'll do anymore putzing for a while, as they say, "Go away in May..."

 

[WilliamG]

Interesting article from 2004. May be most recent interview with managers?

https://institutional.vanguard.com/...ilActivity&IIP_INF=ZZNewsExploitingMarket.jsp

 

[Hillbilly]

Re: Vanguard Asset Allocation fund now 10% cash...

Interesting article from 2004. May be most recent interview with managers?

https://institutional.vanguard.com/V...tingMarket.jsp

RE: "By comparison, our model looks at expected returns over 10 years, which gives us a different perspective. If you look at the equity portion of our portfolio, we'll spend most of our time around the middle. We'll be 60%, 70%, 80%. We've been out to 100% a couple of times, such as in 2002. But that was the first time since 1986 that our model pointed to 100% equities. We can get out to extremes, but once every 16 years is different from a couple of times a year, which you could see in a market-timed portfolio."

As of 1/31/08, they are back to 100% stocks per VG web site....bullish?

 

[FinanceDude]

Why would a fund that tracks an index go to cash? That's NOT index investing.........

 

[Rich_by_the_Bay]

Why would a fund that tracks an index go to cash? That's NOT index investing.........

From Vanguard:

The fund allocates its assets among common stocks, bonds, and money market instruments in proportions consistent with the advisor’s evaluation of their expected returns and risks. These proportions are changed from time to time as return expectations shift. The fund may invest up to 100% of its assets in any one of the three asset classes.
Investment policy

The fund reserves the right to invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, which are types of derivatives. It may use these investments to reallocate the fund’s assets among stocks, bonds, and money market instruments while minimizing transaction costs; maintain cash reserves while simulating full investment in a particular asset class; make trading easier; or seek higher investment returns when a futures contract is priced more attractively than the underlying security or index.
​

I don't see where this fund ever claimed to "track an index."