P.O. Box 2600, Mail Stop V26
Valley Forge, PA 19482-2600
610-503-2398
barry_mendelson@vanguard.com
| November 20, 2013 |
| Amy Miller, Esq. |
| U.S. Securities & Exchange Commission |
| 100 F Street, N.E. |
| Washington, DC 20549 |
via electronic filing
| Re: | Vanguard Valley Forge Funds (the “Trust”) |
| Registration Statement on Form N-14 | |
| File No. 333-191800 | |
Dear Ms. Miller:
This letter is in response to your comments of November 14, 2013 to the Trust’s Registration Statement on Form N-14 (the “Registration Statement”) filed on October 18, 2013, in connection with the acquisition of substantially all of the assets and assumption of all the liabilities of the Vanguard Managed Payout Growth Focus Fund (the “Growth Fund”) and the Vanguard Managed Payout Distribution Focus Fund (the “Distribution Fund”) by the Vanguard Managed Payout Growth and Distribution Fund (the “Growth and Distribution Fund”). Each of the funds (“Funds”) is a series of the Trust. Capitalized terms used herein, and not otherwise defined, have the meanings assigned in the Registration Statement.
| Comment 1: | Fee Tables: Annual Fund Operating Expense |
| Comment: | On the Annual Fund Operating Expense table on page 3, please replace the line |
| item for “Management Expenses” with “Management Fees.” Footnotes 1, 2 and 3 | |
| under the same table as these footnote do not appear to be permitted or required | |
| by the Form and should be removed. | |
| Response: | We have made the changes as requested. |
| Amy Miller, Esq. | ||
| November 20, 2013 | ||
| Page 2 | ||
| Comment 2: | Capitalization Table | |
| Comment: | On the Capitalization Table found on page 32, the table should reflect the impact | |
| of the costs of the Reorganization. | ||
| Response: | Each Fund operates as a fund-of-funds. Under Section 5.5 of the Funds’ Service | |
| Agreement among the various Vanguard funds and Vanguard, expenses otherwise | ||
| allocable to a fund-of-funds can be reduced or eliminated by the savings that | ||
| accrue to the benefit of the underlying funds.1Pursuant to this provision, the | ||
| costs of the Reorganization will be borne by the underlying funds. We have | ||
| included this information in our Pro Forma Consolidated Financial Information, | ||
| where we state that: | ||
| Expenses related to the Reorganization include audit fees and | ||
| printing/mailing fees, and are estimated at $12,000, and $6,000 | ||
| respectively. Actual results could differ from these estimates. These | ||
| expenses will be borne by the underlying funds in which the Funds | ||
| invest. Therefore, there is no impact to the total expenses of the | ||
| surviving fund as a result of the Reorganization. | ||
| Comment 3: | Analysis on Accounting Survivor | |
| Comment: | Please provide aNorth American Security Trustanalysis supporting the assertion | |
| that the Growth and Distribution Fund is the appropriate performance and | ||
| accounting survivor. | ||
| Response: | In 1994, the staff issued the North American Security Trust no-action letter (pub. | |
| avail. Aug. 5, 1994) (“NAST”) setting forth standards for determining which of | ||
| two or more merging funds should be the performance survivor. In NAST, the | ||
| staff stated, in pertinent part: | ||
| In determining whether a surviving fund may use the historical | ||
| performance of one of several predecessor funds, funds should | ||
| compare the attributes of the surviving | fund and the predecessor | |
| funds to determine which predecessor fund, if any, the surviving fund | ||
1This arrangement is disclosed on page 65 of the Managed Payout Funds prospectus dated August 12, 2013: “According to an agreement applicable to the Funds and Vanguard, the Funds’ direct expenses will be offset by Vanguard for (1) the Funds’ contributions to the costs of operating the underlying Vanguard Funds in which the Managed Payout Funds invest, and (2) certain savings in administrative and marketing costs that Vanguard expects to derive from the Funds’ operation.”
Amy Miller, Esq.
November 20, 2013
Page 3
. . . most closely resembles. Among other factors, funds should compare the various funds’ investment advisers; investment objectives, policies, and restrictions; expense structures and expense ratios; asset size; and portfolio composition. These factors are substantially similar to the factors the staff considers in determining the accounting survivor of a business combination involving investment companies. We believe that, generally, the survivor of a business combination for accounting purposes, i.e., the fund whose financial statements are carried forward, will be the fund whose historical performance may be used by a . . . surviving fund.
Our analysis of the NAST factors in the context of the Managed Payout Funds Reorganization follows:
| Comparison of investment advisers:All three predecessor Funds are | ||
| by Vanguard’sEquity Investment Groupand managed by the same | ||
| manager. After the Reorganization, the combined fund will continue | ||
| be advised by the same adviser and same personnel. | ||
| This comparison does not favor one predecessor fund over any other as the survivor. | ||
| Comparison of investment objectives:The investment objectives of the | ||
| predecessor Funds, are as follows: | ||
- The Growth Fundwill makemonthly distributions of cash whileseeking to provide inflation protection and appreciation of investedcapital over the long term.
- The Distribution Fundwill makemonthly distributions of cashwhile seeking to provide preservation of invested capital over thelong term.
- The Growth and Distribution Fundwill makemonthly distributionsof cash while seeking to provide inflation protection andpreservation of invested capital over the long term.
After the Reorganization, the combined fund will use the investment objective of the Growth and Distribution Fund, which will be amended (for clarity) to read “The Fund will make monthly cash distributions while seeking to have these distributions and the invested capital keep pace with inflation over time.”
ØThis comparison favors Growth and Distribution Fund as the survivor.
Amy Miller, Esq.
November 20, 2013
Page 4
•Comparison of investment policies and restrictions:The three predecessor Funds have identical fundamental and non-fundamental investment policies and restrictions. After the Reorganization, the combined fund will continue to have the same investment policies and restrictions.
ØThis comparison does not favor one predecessor fund over any other as the survivor.
•Comparison of expense structures and expense ratios:The three predecessor Funds have the same expense structure in that all three pass through their expenses to their underlying funds pursuant to a provision of the Funds Service Agreement (see Response to Comment 2 above). However, the Funds have different expense ratios based on the different acquired fund fees and expenses of their underlying funds. For the year ended December 31, 2012, the expense ratios were 0.35% for Growth Fund, 0.51% for Distribution Fund, and 0.43% for Growth and Distribution Fund. After the Reorganization, the expense ratio of the combined fund is expected to be 0.39% due to minor adjustments in the mix of underlying funds as well as economies of scale.
ØThis comparison supports either Growth Fund or Distribution and Growth Fund, but not Distribution Fund, as the survivor.
| Comparison of asset size:As of October 31, 2013, the Growth Fund had | ||
| million, the Distribution Fund had $812 million and the Growth and | ||
| Fund had $563 million. | ||
| This comparison favors Distribution Fund as the survivor. | ||
| Comparison of portfolio composition:The portfolio composition will | ||
| that of the Growth and Distribution Fund, since the combined fund | ||
| utilize the Growth and Distribution Fund’s investment objective. In | ||
| the investment allocation of the combined fund would be | ||
| similar to the current Growth and Distribution Fund allocation. | ||
| This comparison favors Growth and Distribution Fund as the survivor. | ||
To summarize: The Funds share identical investment advisers, investment policies and investment restrictions. The Distribution Fund “wins” the asset size comparison, the Growth Fund “co-wins” the expense ratio comparison, and the Growth and Distribution Fund “wins” the investment objectives and portfolio composition comparisons and “co-wins” the expense ratio comparison.
Amy Miller, Esq.
November 20, 2013
Page 5
We believe that, of the three predecessor funds, the post-Reorganization combined fund most closely resembles the Growth and Distribution Fund and that this conclusion is borne out by a comparison of the various factors specified in the NAST letter.
Finally, we think it is important to put the NAST letter into proper perspective. The letter was written at a time when fund providers sometimes merged funds in an effort to “bury” poor performance. It was not uncommon for providers to merge a large fund with a long history (but poor performance) into a much smaller fund with a short history (but excellent performance). The standards set out in the NAST letter were intended to address this abusive practice. We believe that in the absence of such abuse – and nothing remotely abusive is present in the proposed Reorganization of the Managed Payout Funds – the fund provider’s selection of an accounting and performance survivor generally should be respected.
Tandy Requirements
As required by the U.S. Securities and Exchange Commission, the Trust acknowledges that:
- The Trust is responsible for the adequacy and accuracy of the disclosure in theRegistration Statement.
- Staff comments or changes in response to staff comments in the filings reviewed by thestaff do not foreclose the Commission from taking any action with respect to the filing.
- The Trust may not assert staff comments as a defense in any proceeding initiated by theCommission or any person under the federal securities laws of the United States.
Please contact me at (610) 503-2398 with any questions or comments regarding the above responses. Thank you.
Sincerely,
/s/ Barry Mendelson
Barry Mendelson
Principal and Senior Counsel