‘Not the Best Look From Vanguard’: Community Conversations

Readers can’t get enough of a story about a lawsuit filed against the indexing giant. In fact, the story generated record traffic for Barron’s Advisor (in less than 48 hours). Other stories that are spurring reader comments: The big takeaway from Russia’s invasion of Ukraine, whether the stock sell-off is a harbinger of worse to come or a buying opportunity, and the metal value of a nickel.

Photo Illustration by Staff; Dreamstime

Vanguard Sued. Investors in Vanguard Group target-date retirement funds are suing the company for alleged negligence and breach of fiduciary duty. They claim that changes made to target-date funds benefited institutional investors, but left individual investors with taxable accounts “holding the tax bag.”

David Folts seemed to speak for many (his comment has received 98 upvotes and 15 downvotes) writing, “Tough to win a lawsuit when Target Date Retirement Funds are most appropriate for retirement accounts where the large cap gains would have not been taxable. However, not the best look from Vanguard either which seems to focus more now on the big fish instead of the small investor. It’s not acting like a Jack Bogle company any more.”

Kenneth Morales wrote “The ignorance might very well be proven in court to be Vanguard’s. If it could be proven they changed one of their products in a way that put other clients at risk in a mirrored fund, they could be found guilty.” But Omar G. wasn’t biting: “Please explain how ignorance comes into play here. It appears that Vanguard intentionally shifted the tax burden onto these customers.”

Ukraine: Buying or selling opportunity? Two opinion pieces got readers throwing axes (just verbally, hopefully). In the bullish camp, Allan Roth, founder of the planning firm Wealth Logic in Colorado Springs, Colo., argues that advisors should tell clients to buy—not sell. “I constantly remind clients that good times don’t last forever and neither do bad times. So, unless you or your clients know something the rest of the markets don’t, stay in the game and stay with your disciplined rules,” Roth wrote.

Lita Lepie sniffed at Roth’s advice: “Amusing. This is exactly the advice all advisors gave all the way done in 1929. It did not turn out too well for the clients.” Erwin Rosen responded,” If you know something about the market direction tomorrow, or in a week, or a month, etc., please let me know.” To which, Roth wrote, “I agree with Erwin Rosen. If you know the future of markets I suspect you are richer than Elon Musk and Jeff Bezos combined. You may want to read the part about what I know I don’t know. Thanks.” Addressing Roth, Jerod Wurm added, “I appreciate your insight. The four most dangerous words in investing are ‘this time is different.’” 

In the bearish camp is Phillip Toews, CEO and co-portfolio manager for Toews Asset Management in New York. He argues that “a prolonged bear market is likely in the near future,” citing “high valuations” of the S&P 500, the economic impact of Russia invading Ukraine, and the Federal Reserve raising interest rates. He also compared the current war with the Iraqi invasion of Kuwait in 1991 to frame his arguments. 

As part of a longer comment that received 69 upvotes and 6 downvotes, Nicholas Stern wrote, “Sure, there is merit here but this is very much part of the (fear) hype machine. There is zero reference here to rates during that time, which is incredibly important if you are also referencing today’s valuations and a “similar” war-time, time period.  The 10 year finished just under 8% in 1990.  It is just over 2% as of this writing.” Robert Milling, with whom Stern carried on an extended verbal volley, countered, “Yes the ten year was at 8 percent and inflation was around 5 PERCENT. So one could get a 100 percent safe return differential of 3 percent or about 60 percent above inflation. Today inflation is near 8 percent and the ten year is 2 PERCENT. So to get that same differential on a percentage basis the ten year would have to go over 12 percent.” 

Putin’s war will change the world. The U.S. and its allies are enduring headwinds trying to isolate Russia. But according to this week’s cover story, the postwar world order could enhance the benefits of globalization while marginalizing tyrants and their cronies. The article attracted roughly 350 comments, with many focused on energy independence, supply chain issues, nuclear weapons, globalization. Of course, much of the debate was framed as left vs. right.

Randy Newsome wrote, “Hopefully the author has not underestimated the potential impact for the US dollar as the global reserve currency as global trade is realigned. Any hit to the copacetic status of the US dollar in global trade could have a very detrimental [impact].” In a comment that received 40 upvotes and 2 downvotes, Saverio Paglioni wrote, “We need to have both short and long-term solutions and it points to energy independence. Nuclear for the long-run because solar and wind are not totally reliable. Oil and gas have to be put back on-line. Otherwise we are going to find ourselves in similar positions in the future.” Girard Miller wrote, “We need to let Europe decide, not us, whether we’re going to escalate. I’m getting weary of US politicians and even friends who are on this moral high horse that wants to put us at risk of MAD. Putin is a wild card, and no thinking person should take a 1% risk of complete obliteration of the human race.” 

A nickel saved is a dime earned. In 2011, hedge fund billionaire Kyle Bass bought 20 million U.S. nickels at face value, paying $1 million (presumably not in pennies). Why? The value of the metal inside each nickel was worth 6.8 cents at the time. Nickels are made of 75% copper and 25% nickel. 

Bass’s logic was that in an inflationary environment, the nickel’s value in metal would appreciate while in a deflationary environment the nickel’s purchasing power would increase. And a nickel will never be worth less than its five cent face value. 

Fast forward 11 years to last week when nickel prices spiked to $100,000 per metric ton on the London Metal Exchange (LME) before it halted trading (the price was recently near $37,000 as the LME continues to grapple with a chaotic resumption of trading). Nickel prices had been rising before the spike due to sanctions on Russia, a large nickel producer. 

Barron’s ran the numbers. At $100,000 a ton, a nickel is worth about 16 cents in metal. At $50,000 a ton, a nickel’s metal value is about 10 cents. At $25,000 per ton, the metal value of a nickel would approximate 7 cents. 

Excluding security, storage, and transaction costs, which are impossible to determine, Bass seems to have done well on his investment. There’s one small problem. While Bass likely has paper gains (or, er, “coin gains,”) it is illegal to melt nickels. Therefore, in any future sale, Bass would presumably sell his nickels for their metal value to someone who would then be in his current situation. Fact is, even if buyers can’t melt the coins, they trade for more than their face value in metal.

In contrast to Bass, who appears to have unrealized gains, the U.S. Mint is realizing a loss with each nickel it mints, just as it has for the past 16 fiscal years. It cost the Mint 8.52 cents to produce a nickel in the government’s latest fiscal year, which ended in September. That’s when nickel averaged about $17,500 a metric ton.

Readers had fun with this story. Kay Mac wrote, “The melt value of Bitcoin is far higher. It produces hot air to heat homes and facilitate balloon travel during the Armageddon.” Rick M. added, “I’m going to burn my couch and sift through the ashes for bullion.” Bobbie Bard wrote, “Yet another example of government waste. Coins are a thing of the past, especially with inflation raging like it is.” 

If you haven’t yet, check out previous Community Conversations. What do you think of the Vanguard lawsuit? Are you bullish on stocks? Bearish? What will be the biggest legacy of Putin’s actions? And what are your thoughts about coins? 

Write to Greg Bartalos at greg.bartalos@barrons.com