P.O. Box 2600
Valley Forge, PA 19482-2600
610-669-4294
michael_drayo@vanguard.com
April 20, 2016 | ||
Asen Parachkevov, Esq. | ||
U.S. Securities & Exchange Commission | via electronic filing | |
100 F Street, N.E. | ||
Washington, DC 20549 | ||
RE: | Vanguard Variable Insurance Funds | |
File No. 33-32216 | ||
Dear Mr. Parachkevov, |
This letter responds to your March 11, 2016 comments on Post-Effective Amendment No. 76 of the above-referenced registrant (the “Trust”) that was filed on January 25, 2016.
Comment 1: | Statement of Information – Investment Advisory Services: |
Comment: | Form N-1A Item 19(a)(3) requires the registrant to set forth the method of calculating the |
advisory fee payable by the fund including the total dollars paid to the adviser and any | |
advisers who are not affiliated with the adviser for the last three fiscal years. Please | |
consider whether the current disclosure meets these requirements. | |
Response: | Each series of the Trust (each, a “Portfolio” and collectively, the “Portfolios”) discloses its |
method of calculating advisory fees including any fulcrum fees. As an example, the | |
Growth Portfolio makes the following disclosure: | |
“The Portfolio pays each of its independent third-party investment advisors a base fee plus | |
or minus a performance adjustment. Each base fee, which is paid quarterly, is a percentage | |
of average daily net assets managed by the advisor during the most recent fiscal quarter. | |
The performance adjustment, also paid quarterly, is based on the cumulative total return of | |
each advisor’s portion of the Portfolio relative to that of the Russell 1000 Growth Index | |
over the preceding 36-month period (60-month period for William Blair & Company).” | |
The disclosure also sets forth the aggregate amount of advisory fees paid by a Portfolio | |
(including separate disclosure of fulcrum fee amounts) during its last three (3) fiscal years. | |
In accordance with our multi-manager exemptive relief (see Vanguard Convertible | |
Securities Fund, et al. May 29, 2003), we are not required to separately disclose the fees | |
paid to external advisers on an adviser by adviser basis. |
Asen Parachkevov, Esq.
April 20, 2016
Page 2
We believe the disclosure is consistent with both the form requirement and exemptive | |
relief, and does not plan to make any changes. | |
Comment 2(a): | Prospectus – Fees and Expenses: |
Comment: | Please file an updated fee table in your correspondence so that it may be reviewed. |
Response: | As requested, updated fee tables for the Portfolios have been filed with this letter. See |
Exhibit A. | |
Comment 2(b): | Prospectus – Fees and Expenses – Money Market Portfolio: |
Comment: | Confirm that there is no ability to recoup the amount of net operating expenses voluntarily |
waived. | |
Response: | We confirm that the Portfolio is not obligated to repay amounts subject to the temporary |
expense limitation. | |
Comment 3: | Prospectus – Purchase and Sale of Shares: |
Comment: | Item 6: “Purchase and Sale of Shares” disclosure appears to be missing from the |
Prospectus, please include or explain why the information was omitted. | |
Response: | The Portfolios are mutual funds used solely as investment options for annuity or life |
insurance contracts offered by insurance companies. The Portfolios’ shares may not be | |
purchased directly, instead they may only be purchased through a contract offered by an | |
insurance company. For this reason, standard Vanguard purchase and sale disclosure is | |
not applicable. | |
Any minimum and subsequent investment requirements as well as redemption procedures | |
are set forth in the prospectus for the annuity or life insurance program. The Portfolio’s | |
prospectus notes that shares may be redeemed on any business day. | |
Comment 4(a): | Prospectus – Primary Investment Strategies/Primary Risks – Money Market |
Portfolio: | |
Comment: | As the Portfolio approaches the compliance date of the new money market fund rules in |
October 2016, set forth the Portfolio’s plan for complying with the rule, and the plan for | |
updating the Prospectus. (e.g., whether the Portfolio is a retail, government, or | |
institutional money market fund). | |
Response: | The Trust’s board of trustees (the “Board”) has approved a number of changes in response |
to the SEC’s 2014 amendments to the rules governing money market funds. In | |
conjunction with these reforms, Vanguard has designated Money Market Portfolio as a | |
retail money market fund. Policies and procedures will be instituted to limit all beneficial | |
owners of the Portfolio to natural persons. Further, in combination with the annual | |
registration statement update, the Portfolio’s prospectus will include a summary of the |
Asen Parachkevov, Esq.
April 20, 2016
Page 3
reform's impact (e.g.,disclosures related to discretionary liquidity fees and default | |
liquidity fees), which may be further supplemented and amended in conjunction with | |
subsequent rule effective dates. | |
Comment 4(b): | Prospectus – Primary Investment Strategies/Primary Risks – Money Market |
Portfolio: | |
Comment: | Confirm what NAV stabilization methods the fund is permitted to use pursuant to its |
Declaration of Trust. | |
Response: | The Trust’s Declaration of Trust of the Registrant neither enumerates nor limits the NAV |
stabilization options available to the Portfolio. | |
Comment 4(c): | Prospectus – Primary Investment Strategies/Primary Risks – Money Market |
Portfolio: | |
Comment: | Confirm whether the fund intends to engage in any foreign investments to the extent that |
merits a foreign disclosure risk in the Principal Risk section. | |
Response: | We have considered the comment and intend to add a principal risk disclosure on foreign |
investments. | |
Comment 4(d): | Prospectus – Primary Investment Strategies/Primary Risks – Short-Term |
Investment Grade Portfolio: | |
Comment: | As the Portfolio uses the term “Short-Term” in its name, please confirm that the |
Portfolio’s dollar-weighted average maturity will not exceed three years. | |
Response: | We believe that the Portfolio’s investment program is consistent with reasonable |
investors’ expectations for a fund that uses “short-term” in its name. The adopting release | |
for Rule 35d-1 under the Investment Company Act of 1940 states that the purpose of the | |
rule is to prevent an investment company from adopting a name that could mislead | |
investors about the fund’s investments and risks. In the adopting release, the SEC | |
provided guidance that the dollar-weighted average maturity for a short-term bond fund | |
should not exceed 3 years. The text of the rule, however, does not require a 3-year | |
maximum maturity for short-term funds. We believe that under any reasonable | |
interpretation of the adopting release and Rule 35d-1, a dollar-weighted average maturity | |
range of 1-4 years qualifies as “short-term.” For these reasons, we believe that the name of | |
the Short Term Investment Grade Portfolio is not misleading. | |
Comment 4(e): | Prospectus – Primary Investment Strategies/Primary Risks – Total Bond Market |
Index Portfolio, Short-Term Investment Grade Portfolio and High Yield | |
Portfolio: | |
Comment: | Consider whether additional risk disclosure is appropriate to reflect potential of volatility |
and increased redemptions due to the potential impact of tapering of quantitative easing | |
and/or rising interest rates? See IM Guidance Update 2014-1. |
Asen Parachkevov, Esq. |
April 20, 2016 |
Page 4 | |
Response: | We have considered the comment, and believe the current risk disclosure appropriately |
reflects the Portfolio’s risks. | |
Comment 4(f)(1): | Prospectus – Primary Investment Strategies/Primary Risks – Conservative |
Allocation: | |
Comment: | What are the securitized investment grade foreign bonds in which the portfolio may |
indirectly invest? Is it a collateralized obligation(i.e.,CDO/CLO?). If that is the case, to | |
what extent is the Fund invested in these products, and how is liquidity determined for | |
these investments? | |
Response: | The Portfolio is a “Fund of Funds” and does not directly invest in securitized investment |
grade foreign bonds. The Portfolio may invest in mutual funds that may invest in such | |
instruments. Underlying funds’ securitized investment grade foreign bonds include | |
primarily covered bonds. The Portfolio is not currently exposed to CDOs/CLOs. As of | |
December 31, 2015, the Portfolio’s indirect exposure to securitized investment grade | |
foreign bonds was less than 1% of its assets. | |
Comment 4(f)(2): | Prospectus – Primary Investment Strategies/Primary Risks – Conservative |
Allocation: | |
Comment: | What are you using to hedge foreign currency exposure? If this is a principal strategy, |
please disclose. | |
Response: | As a Fund of Funds, the Portfolio invests in an underlying mutual fund that invests in |
foreign bonds issued in currencies other than the U.S. dollar. This underlying fund seeks | |
to hedge any such bond investments typically by using foreign currency exchange forward | |
contracts. We intend to include language indicating that foreign currency exchange | |
forward contracts are used by the underlying fund for currency hedging purposes. | |
Comment 4(f)(3): | Prospectus – Primary Investment Strategies/Primary Risks – Conservative |
Allocation: | |
Comment: | What is the historical deviation of the large cap U.S. stocks and the small- and mid-cap |
U.S. stocks from the target allocation percentage? Disclose the highest and lowest | |
deviation from target and how long did it take the Portfolio to get back to target? | |
Response: | During the Portfolio’s last fiscal year, the Portfolio’s deviation from its target allocations |
ranged from 0.1% to 1.1% for the large cap U.S. stocks, and -0.5 to -0.8% for small- and | |
mid-cap U.S. stocks. The average deviation for the period was 0.53% and -0.45%, | |
respectively. Deviations above a certain threshold are typically addressed in a couple of | |
business days. We do not believe the deviations are meaningful and do not intend on | |
disclosing the highest and lowest deviation. | |
Comment 4(g): | Prospectus – Primary Investment Strategies/Primary Risks – Equity Income |
Portfolio: |
Asen Parachkevov, Esq. |
April 20, 2016 |
Page 5 | |
Comment: | The fund discloses that it invests mainly in common stock. If there is anything other than |
common stock that is part of its principal strategy you should disclose it. | |
Response: | The Portfolio seeks to track the performance of the S&P 500 Index, which is a benchmark |
dominated by stocks of large U.S. companies. As a result, the Portfolio’s principal | |
strategy is to own U.S. stocks. Accordingly, we do not plan to revise the principal | |
strategy disclosure. | |
Comment 4(h): | Prospectus – Primary Investment Strategies/Primary Risks – Mid-Cap Index |
Portfolio: | |
Comment: | Please provide the cap range for the target index. |
Response: | As of December 31, 2015, the market capitalization range of the Portfolio’s target index |
(i.e.,CRSP US Mid Cap Index) was $1.5 billion to $25.2 billion. | |
Comment 4(i): | Prospectus – Primary Investment Strategies/Primary Risks – Small Company |
Growth Portfolio: | |
Comment: | Disclose the cap range for the small cap companies in which the Portfolio primarily |
invests. | |
Response: | We disclose the Portfolio’s median market capitalization in our Item 9 disclosure (i.e., |
$1.5 billion as of December 31, 2015). We do not plan to include the market | |
capitalization range in the prospectus for the following reasons: | |
(1) Market capitalization ranges are subjective over different time periods and among | |
different investment advisors and funds. Defining a particular market capitalization as a | |
specific dollar range could confuse investors because the dollar ranges are varied over | |
time and among advisors and funds. | |
(2) Ranges change continually because of fluctuations in stock market valuations. | |
Therefore, disclosure of one range in a prospectus could be misleading when the stock | |
market fluctuates. | |
(3) A fund’s overall market capitalization range can be very broad and not indicative of | |
where the fund’s overall market capitalizationfocusis. We believe the median market | |
capitalization is a more useful piece of information for investors concerned with market | |
capitalization. | |
(4) Form N-1A does not require funds to disclose specific market capitalization dollar | |
ranges. | |
Comment 4(j): | Prospectus – Primary Investment Strategies/Primary Risks – International |
Portfolio: | |
Comment: | Conform disclosure to requirements that companies should be economically tied to |
regions outside of U.S, not just located outside U.S. | |
Response: | We confirm that the Portfolio will invest predominately in stocks of companies |
economically tied to regions outside of U.S., not just located outside U.S. We note that |
Asen Parachkevov, Esq.
April 20, 2016
Page 6
neither Form N-1A nor the names rule requires specific prospectus disclosure concerning | |
this topic. We believe our existing disclosure is accurate and complies with the existing | |
disclosure requirements, and therefore do not plan to change it. | |
Comment 5: | Prospectus –Annual Total Returns – Money Market Portfolio: |
Comment: | If more than one benchmark is used for comparative purposes, then a description of the |
additional benchmark should be provided in a footnote. | |
Response: | We have added a description of the comparative index to the prospectus glossary. |
Comment 6: | Statement of Additional Information – Investment Strategies, Risks, and |
Nonfundamental Policies – Total Bond Market Index Portfolio, Short-Term | |
Investment Grade Portfolio, High Yield Portfolio: | |
Comment: | If derivatives are a principal investment strategy based on their actual use, please disclose |
such in the Principal Investment Strategies and Principal Risks sections of the Prospectus. | |
Response: | While the Portfolios may utilize derivatives as part of their investment strategy, they are |
not the Portfolios’ principal investments. Accordingly, we do not plan to revise the | |
disclosure. | |
Comment 6: | Tandy Requirements: |
As required by the SEC, the Portfolios acknowledge that: | |
· | The Portfolios are responsible for the adequacy and accuracy of the disclosure in the filing. |
· | Staff comments or changes in response to staff comments in the filings reviewed by the staff do |
not foreclose the Commission from taking any action with respect to the filing. | |
· | The Portfolios may not assert staff comments as a defense in any proceeding initiated by the |
Commission or any person under the federal securities laws of the United States. |
Sincerely,
Michael J. Drayo
Senior Counsel
EXHIBIT A | |
Money Market Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.13% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses1 | 0.16% |
1 Vanguard and the Portfolio’s Board have voluntarily agreed to temporarily limit certain net operating expenses in excess of the Portfolio’s daily yield so as to maintain a zero or positive yield for the Portfolio. Vanguard and the Portfolio’s Board may terminate the temporary expense limitation at any time.
Short-Term Investment-Grade Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.13% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.16% |
Total Bond Market Index Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.12% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.15% |
EXHIBIT A | |
High Yield Bond Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.25% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.28% |
Conservative Allocation Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | None |
12b-1 Distribution Fee | None |
Other Expenses | None |
Acquired Fund Fees and Expenses | 0.16% |
Total Annual Portfolio Operating Expenses | 0.16% |
Moderate Allocation Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | None |
12b-1 Distribution Fee | None |
Other Expenses | None |
Acquired Fund Fees and Expenses | 0.16% |
Total Annual Portfolio Operating Expenses | 0.16% |
EXHIBIT A | |
Balanced Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.21% |
12b-1 Distribution Fee | None |
Other Expenses | 0.02% |
Total Annual Portfolio Operating Expenses | 0.23% |
Equity Income Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.29% |
12b-1 Distribution Fee | None |
Other Expenses | 0.02% |
Total Annual Portfolio Operating Expenses | 0.31% |
Diversified Value Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.25% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.28% |
EXHIBIT A | |
Total Stock Market Index Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | None |
12b-1 Distribution Fee | None |
Other Expenses | None |
Acquired Fund Fees and Expenses | 0.16% |
Total Annual Portfolio Operating Expenses | 0.16% |
Equity Index Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.12% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.15% |
Mid-Cap Index Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.16% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.19% |
EXHIBIT A | |
Growth Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.41% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.44% |
Capital Growth Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.33% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.36% |
Small Company Growth Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.34% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Acquired Fund Fees and Expenses1 | 0.01% |
Total Annual Portfolio Operating Expenses | 0.38% |
1 Acquired Fund Fees and Expenses are not included in the Portfolio’s financial statements, which provide a clearer picture of a portfolio’s actual operating costs.
EXHIBIT A | |
International Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.37% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.40% |
REIT Index Portfolio | |
Annual Portfolio Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Fees | 0.24% |
12b-1 Distribution Fee | None |
Other Expenses | 0.03% |
Total Annual Portfolio Operating Expenses | 0.27% |