(PUB) Investing 2016

PARTNERSHIP Steady As She Goes on Partnership Dividends

were required to give up their shares in the Partnership Program when they left. But the numbers give at least some insight into how well the top dogs (like current chairman Bill McNabb) are probably being compensated. It may not be hedge fund money, but it isn’t seaman’s wages, either. The  Partnership Plan  is Vanguard’s internal profit-sharing mechanism, designed to reward all employees, from top management to phone operators, with a piece of the profits the low-cost fund provider generates each year. Based in large measure on assets under man- agement, rather than fund performance, and factoring in the “cost savings” that accrues by comparing Vanguard’s aver- age operating expense ratio to industry averages, the  Partnership Plan  pays out millions of dollars a year to Vanguard’s top dogs, while limiting most employees to a bonus that is calculated using a tricky set of variables related to their job “grade” and tenure to determine the ultimate payout. The calculations that determine the  Partnership Plan  dividend are done in secret, and Vanguard doesn’t normally provide many details about their  Partnership Plan , which was established by Jack Bogle in 1984 but has since been rejiggered to limit pay- outs to the “crew” while keeping pay- outs high for the “captains.” Since its first year, the  Partnership Plan ’s divi-

IT’S “STEADY AS SHE GOES” at Vanguard’s Partnership Plan , where executives will see a 12.0% increase in their dividend, to $185.44 from $165.57 for 2015. Asset growth over the trailing three years fell a bit, from 73% to 56%, about on par with the trailing three- year growth rate that generated a simi- lar 12.0% rise in the Partnership Plan’s dividend two years ago. Vanguard’s board uses a three-year trend to help them determine just how big the annu- al Partnership Plan  payout will be. Unlike last year, Vanguard didn’t pay out a special “40 th  Anniversary” dividend, so there may be some grumbling on the Vanguard campus if expectations exceeded reality. Vanguard long ago stopped disclos- ing the data that allowed me to calcu- late the annual compensation then paid to founder Jack Bogle and Vanguard’s second chairman, Jack Brennan. But assuming that both men were both still in the mix, and assuming that nei- ther one was awarded a single addi- tional share in the Partnership Plan  after the period when disclosures ended, and applying a haircut to keep my numbers on the low side, I estimate Bogle’s  Partnership Plan  payout for 2015 would have totaled about $18.8 mil- lion and Brennan’s around $10.8 million. Of course, neither Bogle nor Brennan works at Vanguard any longer, and they

Partnership Distributions Have Outpaced 500 Index

$100 $120 $140 $160 $180 $200

Partnership dividend 500 Index fund

$0 $20 $40 $60 $80

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dend has risen from $3.43 to the current $185.44, growing more than 54 times. The value of one share of  500 Index has, with all distributions reinvested, grown 24 times over the same period. Vanguard is exceedingly profitable, and has the ability to pay its captains millions of dollars every year. The takeaway for a Vanguard inves- tor is pretty clear. Vanguard is not, and has never been, a non-profit, though much of the language around “operat- ing at cost” does, at times, make it sound as though they are. The company is exceedingly profitable, and hence has the ability to pay its captains millions of dollars every year. (90% of the top executives’ compensation comes in the form of dividends from the Partnership Plan .) As Jeff has pointed out in the past, just one fund like Total Stock Market Index generates hundreds of millions of dollars in fees each year. Indexing may have made some investors wealthy over the three decades the Partnership Plan has been around, but the successful marketing and running of index funds is contrib- uting even more to the bank accounts of Vanguard’s executive team. n

Dividend Growth Holds Steady Under McNabb

With Rising Assets, Dividends Should Grow

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Three-year asset growth Partnership dividend

Partnership Plan Dividend Growth -20% -10% 0%

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The Independent Adviser for Vanguard Investors • July 2016 • 7

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