How a Big Fund Dodged Bear’s Bullet

04/09/2008 12:00 am EST


Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Daniel Wiener, editor of The Independent Advisor for Vanguard Investors, tells how the managers of a big Vanguard fund avoided the worst of the Bear Stearns debacle.

I won’t begin to try and decode all of the events that led to the March 16th weekend shocker that Bear Stearns would be sold to JPMorgan Chase (NYSE: JPM) for a mere $2 per share, having closed the prior week’s trading at $30, after rumors swirled of a possible run on Bear’s bank.

Nor will I get into the machinations of the second, $10-per-share buyout that resulted, in part, from criticism that the Federal Reserve was allowing JPMorgan to just about steal the bank away.

The issue for you and me is the huge stake that Vanguard Windsor II’s (VWNFX) Jim Barrow held in the company—both companies, actually. At first blush, the huge decline in Bear stock had to have a profound impact on Windsor II. But the fact is that the Bear decline was tempered by the rise in JPMorgan Chase shares.

Take a look at the two days, Friday and Monday, that bracketed the weekend [of March 15-16] when the Fed and JPMorgan Chase got together to bail out the smaller bank. On Friday, a generally lousy day for the markets, Bear’s stock fell 47.4%, and Windsor II fell 2.8%. Vanguard Total Stock Market index (VTSMX) fell 2.1% on the day, and the iShares Dow Jones US Financial Sector ETF (NYSEArca: IYF) dropped 3.2%.

Clearly, Windsor II suffered more than the market, but it wasn’t as if the fund were a financials-only portfolio. On Monday, as Bear stock was falling another 84%, JPMorgan Chase’s stock was rising, up 10.3% as investors rightly realized that this was going to be a good thing for the acquirer. Windsor II dropped 1.1% on the day while Total Stock Market dropped 1.2% and the Financials ETF fell 1.7%.

At the end of January, Bear Stearns represented 1.5% of Windsor II’s assets, while JPMorgan Chase was 2.6%. Between October and January, Windsor II’s position in Bear had been cut by 5.9%, while its JPMorgan Chase position was raised by 3.4%. Judging by the price action in mid-March, I would wager that Barrow and Windsor II dramatically cut their stake in Bear Stearns before the Monday debacle.

It’ll be interesting to see how this plays out when Vanguard discloses Windsor II’s stock positions at the end of the third quarter. But the bottom line is that even with Barrow, Hanley’s huge position in the stock, Windsor II did not suffer horribly. Through the first quarter, Windsor II is down 11.2%, compared to -9.0% for Vanguard Value Index (VIVAX) and -9.5% for Total Stock Market. Vanguard Capital Value (VCVLX), a more deep-value fund, is down 15.2%, and older brother Windsor (VWNDX) is down 12.5%. Clearly, Bear was not a knock-out blow for Windsor II.

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