Vanguard to buy another $1B in Berkshire shares

AP

(MoneyWatch) Vanguard is making some major changes. Those changes will have a positive impact for Berkshire Hathaway (BRK) and a negative impact on a stock called MSCI and the Korean stock market as a whole.

These result from an October 2 announcement that the giant index fund company is changing index providers for 22 of its index funds. The index provider decides the stocks and the weightings of those stocks. MSCI is the index provider that is being replaced with two new index providers, FTSE and CRSP.

Good news for Berkshire Hathaway

The giant $200 billion Vanguard Total Stock Index Fund will be buying an additional $1 billion Berkshire stock. That's because Berkshire has two different share classes, and MSCI included only the B share and left out the A share. Since Berkshire's total value comprises both share classes, the CRSP index includes both. The additional purchase represents about 0.5 percent of Berkshire shares.

Bad news for Korea

MSCI considers South Korea an emerging market country, while FTSE considers it a developed market. The $72 billion Vanguard Emerging Market Index Fund owns over $10 billion of Korean stocks. Those must be sold, as the FTSE does not include Korea. Other Vanguard smaller developed market funds will need to buy Korea, and HSBC estimates the net sell will be about $8 billion, which represents about 1.5 percent of the total value of Korea's stock exchange.

Though that may not seem like much, imagine if investors pulled 1.5 percent of their money out of the U.S. stock market.  The Vanguard Total International Stock Fund will also be switching from MSCI to FTSE, but every country is in both indexes, yet another reason why broad indexing is superior to narrower indexes.

Very bad news for MSCI

The outgoing index provider, MSCI, is a publicly held company. On the day Vanguard made the announcement, its stock plunged 30 percent. When a giant takes its business elsewhere, it can have a huge impact. Vanguard has about a 50 percent share of global stock index funds. MSCI may now be forced to lower licensing fees to remaining customers.

What it means for investors

I've spent some time researching these index changes and talking to folks like Joel Dickson, principal in Vanguard's investment strategy group. After some initial costs of making the required changes, the reduced licensing fees should save the Vanguard funds a ton of money. Because the fund owners own Vanguard, those savings will be passed on irrespective of whether you own the mutual fund or the exchanged-trade fund share class.

I asked Dickson to translate the savings into fee reductions. He declined to give specific estimates, but noted they would be significant over time. British financial giant HSBC stated that "Vanguard's index fees are likely to fall to below 2 basis points." That translates to an expense ratio of 0.02 percent.

From what I've seen on the construction of the FTSE and CRSP indexes, they are every bit as good as the MSCI indexes. And, in my opinion, nobody knows indexing like Gus Sauter, the Vanguard chief investment officer who will be retiring at the end of the year. His track record alone inspires confidence that this change will prove to be in the best interests of the shareholders. And if HSBC is right about fees falling to 0.02 percent of assets, this could be great for investors.

  • Allan Roth On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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