Vanguard Group Inc.’s emerging markets fund managers will need to sell shares of South Korean (KOSPI) companies after the largest U.S. mutual-fund company replaced MSCI Inc. (MSCI) with FTSE Group as the benchmark provider for six equity funds.
The FTSE Emerging Index, which classifies South Korea as a developed market, will replace the MSCI Emerging Markets Index as the benchmark for the Vanguard Emerging Markets Stock Index Fund (VEIEX), Vanguard said in a statement yesterday. Six Vanguard international index funds with assets of $170 billion will transition to benchmarks in the FTSE Global Equity Index Series, according to the statement.
Money managers of so-called tracker funds can’t own shares that are listed in a country not covered under its benchmark. Vanguard’s emerging markets fund will need to sell positions in South Korean stocks to comply with its classification, said Julie Andrews, a director in Australia for FTSE Group. The change to FTSE benchmarks is the largest ever switch in international index providers, according to an FTSE statement yesterday.
“This change will have an impact on asset allocation for these fund managers,” said Nader Naeimi, Sydney-based head of dynamic asset allocation at AMP Capital Investors Ltd., which manages almost $100 billion. “If Korea becomes developed status, then they’re going to have to get money out. But funds that manage developed markets will need to buy.”
Vanguard, known for its low-cost index funds, manages about $1.95 trillion in U.S. mutual fund assets. The change will affect both index mutual funds and exchange-traded funds at Vanguard, whose ETFs are structured as share classes of its mutual funds.
The $58 billion Vanguard MSCI Emerging Markets ETF (VWO) had 13 percent of its allocation in South Korea shares at the end of June, according to data compiled by Bloomberg. The ETF trades throughout the day like stocks on U.S. exchanges and is designed to mimic the MSCI benchmark index without trying to outperform the gauge. Vanguard’s Developed Markets Index Fund is worth $11.3 billion, more than 70 percent below the value of the emerging markets ETF, according to FTSE Group.
MSCI shares slumped the most on record yesterday, tumbling 27 percent to $26.21 in New York, after Vanguard said funds with about $537 billion in assets will replace New York-based MSCI to cut costs for fund shareholders. That’s the most since it went public in November of 2007. In addition to the FTSE gauges, Vanguard will also adopt benchmarks developed by the University of Chicago’s Center for Research in Security Prices for 16 U.S. equity and balanced funds.
Vanguard will over time bring its emerging markets stocks fund in line with the FTSE benchmark, Andrews at FTSE Group said in an emailed response to questions today. “It is Vanguard that is implementing the transition, and it is our understanding that it will be managed gradually over time to minimize impact,” she said.
FTSE Group said Vanguard will move the following U.S. domiciled international funds to a FTSE benchmark: Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, Vanguard Emerging Markets Stock Index Fund, Vanguard Total International Stock Index Fund, Vanguard Developed Markets Index Fund, and the Vanguard Tax-Managed International Fund.
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