Vanguard to merge insured, uninsured municipal bond funds

By Aaron Hochman-Zimmerman

New York, Nov. 4 - Vanguard Group announced it will merge its $3.2 billion Vanguard Insured Long-Term Tax-Exempt Fund into its $2.8 billion Vanguard Long-Term Tax-Exempt Fund.

"The municipal bond market has changed to a point where insured bonds provide little, if any, additional benefit over high-quality uninsured credits," said Gus Sauter, Vanguard's chief investment officer, in a statement.

"Shareholders will be better served by merging the two portfolios to create a single, well-diversified, high-quality fund," he said.

When the credit crisis claimed the AAA rating of three of the six major bond insurers, many insured municipal bonds began to trade based on the rating of the issuer rather than the credit quality of the municipal bond issuer.

Therefore, "Vanguard's credit-research group performs an objective, independent analysis of the creditworthiness of any issue in which Vanguard invests or expects to invest," said Sauter in the statement.

"While industry ratings are an important indicator of financial strength, the credit research group conducts additional due diligence, scrutinizing each bond and its issuer before recommending a purchase into a Vanguard portfolio."

As the two funds merge on Dec. 12, the insured fund will close to new accounts.

Valley Forge, Pa.-based Vanguard manages more than $1 trillion in U.S. mutual fund assets, including more than $390 billion in employer-sponsored retirement plans.

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