Vanguard shuts down fund, fires adviser

NEW YORK (Reuters) - Vanguard on Friday closed one of its worst-performing funds, fired its adviser, and announced plans to transfer its remaining $8.6 billion in assets to another fund that follows a passive investment strategy.

The Pennsylvania-based fund firm, with more than $1.6 trillion under management, said it was closing its Vanguard Asset Allocation fund after it posted losses of nearly 6 percent in the year to date -- half of them this month.

Mellon Capital Management, which served as adviser for two of the firm's funds, including the Asset Allocation, was dismissed by Vanguard chief executive Bill McNabb.

Vanguard's own Quantitative Equity and Fixed Income groups will work together as advisers for the Asset Allocation fund from now on, the firm said in a statement.

The "combination of those advisers will provide less volatility and more competitive returns going forward," said John Woerth, a spokesman for Vanguard.

Introduced in 1988, the Asset Allocation fund was free to invest up to 100 percent of its assets in either U.S. stocks, bonds, or money market instruments. The proportion invested in each asset class changed according to Mellon's evaluation of expected risk and returns, Vanguard said.

The fund's strategy had long puzzled some investors, who found it difficult to classify it as a stock or a bond fund for the purpose of their asset allocation plans.

In the past few months, the fund made some "ill-timed shifts between stocks and bonds," which reflected poorly in its performance, Daniel Wiener, who writes a newsletter for Vanguard investors, said in a note.

The year-to-date performance by the Asset Allocation fund was the second worst among Vanguard's active balanced funds, only better than the 6.7 percent loss made by the Managed Payout Growth fund, Wiener noted.

PASSIVE STRATEGY

Vanguard now wants to merge the Asset Allocation fund into its $11.1 billion Vanguard Balanced Index fund, which invests 60 percent of its assets in stocks and 40 percent in bonds, tracking two indexes that represent the broad U.S. equity and U.S. taxable bond markets.

"We expect that the strategic approach followed by the Balanced Index Fund will provide competitive returns over the long-term with less risk," McNabb said in a statement.

Vanguard is now asking for shareholders' approval to conclude the merger. Until it happens, the new advisers will gradually shift the fund to a static 60 percent stocks/40 percent bonds portfolio, the firm said.

That change will also affect four other Vanguard funds included in its LifeStrategy series. Those funds, which invest part of their assets in the Asset Allocation product, will gradually eliminate their exposure to actively-managed funds and adopt an index-tracking strategy only.

"An all-index approach has several benefits, including lower costs and a simplified portfolio design," McNabb said.

The LifeStrategy family of funds provided $5 billion of the $8.6 billion invested in Asset Allocation fund, Vanguard's spokesman said.

(Reporting by Jessica Toonkel, writing by Walter Brandimarte; Editing by Walden Siew)