Vanguard Shuffling Stock and Bond Allocations in Balanced STAR Fund

“The biggest change is removing the three fixed income funds for a new fund that will follow the same strategy as Vanguard Core Plus Bond Fund. Core Plus Bond represents a broader portfolio than the combination of the three outgoing funds. So, I think there’s more potential for the managers to add value with that strategy than the three stand-alone funds. Also, one fund is operationally easier to deal with than three funds as there should be fewer rebalancing trades,” the Morningstar analyst explained.

Jeff DeMaso, editor of the Independent Vanguard Adviser, said via email that he doesn’t see the changes as reflecting a big market shift.

“The fund is still targeting 63% stocks and 37% bonds. So, the overall stock/bond mix is staying the same,” he told ThinkAdvisor.

In a report to his newsletter readers, DeMaso said the change in the “fund of funds” is more “an evolution than a revolution.”

The bond-side change does seem to add more flexibility and makes sense, he said, but DeMaso didn’t see how the shuffling brings better balance to the stock holdings.

“STAR already had an even split between growth and value funds overseas, and a sub-4% position in Dividend Growth will barely move the needle — if it registers at all,” he wrote. He also considered it “a little odd” that STAR won’t own a small stock fund.

“One thing STAR’s shareholders will have to keep an eye on is the tax implications of this transition. Moving around the bond funds probably won’t be too problematic, but selling the stock funds could lead to a large capital gains bill at the end of the year,” DeMaso said.

While STAR has about $23 billion in assets, cash has flowed out for 18 consecutive years.

“In the age of ETFs and target-date funds, STAR’s usefulness as a starter fund has run its course,” DeMaso added.

“The adjustments to STAR’s allocations are meant to improve outcomes for investors and we believe these changes will help long-term investors,” a Vanguard spokesperson told ThinkAdvisor by email.

Over the fund’s nearly 40 years, the spokesperson added, “Vanguard’s fund lineup and approach to multi-asset portfolio construction has evolved. We believe these changes will improve the Fund’s long-term return potential while improving its risk profile by mitigating style biases.”