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[THE VANGUARD GROUP/ (R)/ LOGO]
November 30, 2004
Christian Sandoe, Esq.
Division of Investment Management
U.S. Securities and Exchange Commission via electronic filing
450 Fifth Street,
N.W., Fifth Floor
Washington, D.C. 20549
RE: VANGUARD CHESTER FUNDS; COMMENTS ON PEA 29
Dear Mr. Sandoe:
The following responds to your comments of November 23, 2004 on the
post-effective amendment of the registration statement of Vanguard Chester
Funds. You commented on PEA number 29 that was filed on October 12, 2004
pursuant to Rule 485(a). Please note that each prospectus page reference is to
the Vanguard PRIMECAP Fund prospectus.
COMMENT 1: VANGUARD PRIMECAP FUND (PROSPECTUS PGS. 1 AND 4)
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Comment: The More on the Fund section provides that the Fund's board
may change investment strategies or policies in the interest
of shareholders without a shareholder vote, unless those
strategies or policies are designated as fundamental. Is the
Fund's investment objective a fundamental policy? Item 4(a)
requires a fund to designate whether the investment objectives
may be changed without shareholder approval, and Item 11(c)
requires a fund to disclose a policy that a fund deems
fundamental, including the objective.
Response: The PRIMECAP Fund has a fundamental investment objective. As
such, we will add the following sentence to the "Investment
Limitations" section of the SAI: "INVESTMENT OBJECTIVE". The
investment objective of each Fund may not be materially
changed without a shareholder vote."
COMMENT 2: VANGUARD PRIMECAP FUND (PROSPECTUS P. 8)
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Comment: In the Cash Management section, Vanguard CMT Funds are
described as funds "established under an SEC exemption." The
funds were not established by the exemption, rather the use of
the funds by other affiliated funds was permitted by an SEC
exemption. Clarify this language.
Post Office Box 2600, Valley Forge, Pennsylvania 19482-2600
(610) 669-1000 . www.vanguard.com
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Christian Sandoe
November 30, 2004
Page 2
Response: We propose to revise the first sentence of the Cash Management
section as follows: "Vanguard may invest the Fund's daily cash
balance in one or more Vanguard CMT Funds, which are very
low-cost money market funds. The Fund is permitted to invest
in the CMT Funds under the terms of an exemptive order granted
by the Securities and Exchange Commission."
COMMENT 3: VANGUARD PRIMECAP FUND (PROSPECTUS P. 9)
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Comment: In the prospectus discussion of the Fund's investment advisor,
there is the following statement, "Under the terms of an SEC
exemption, the Fund's board of trustees may, without prior
approval from shareholders, change the terms of an advisory
agreement or hire a new investment advisor--either as a
replacement for an existing advisor or as an additional
advisor." Is this statement consistent with the Fund's
multi-manager exemptive order?
Response: Yes. The disclosure is consistent with the Fund's exemptive
order. See Vanguard Convertible Securities Fund, et al.,
SEC File No. 812-12380, Investment Company Act Release
Nos. 26062 (Notice) (May 29, 2003) and 26089 (Order)
(June 25, 2003).
COMMENT 4: VANGUARD PRIMECAP FUND (PROSPECTUS P. 19)
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Comment: On page 19 of the prospectus, there is a disclosure of share
class conversions from the Investor Share Class to the Admiral
Share Class based on an investor's tenure in the Fund. One of
the conditions of a tenure conversion is the investor's
registration on Vanguard.com. Why is there a requirement to
register with Vanguard.com in order to convert from Investor
to Admiral Share Class based on tenure in the Fund?
Response: Limiting Admiral Share eligibility in certain circumstances to
those shareholders who register with Vanguard.com is designed
to encourage more shareholders to register. It costs far less
to effect transactions (buys, sells, exchanges), communicate
information, and conduct other business over the web than it
does through other channels such as phone or mail. Although
web-registered shareholders are not required to transact or
communicate with Vanguard using the web, we believe that many,
if not most, investors who register will soon interact with
Vanguard primarily through the web, generating savings that
are passed through directly to all Vanguard fund shareholders.
The eligibility criteria for Admiral Shares is part of the
PRIMECAP Fund's Rule 18f-3 Multiple-Class Plan. The current
version of the Plan was filed as an exhibit to the Fund's
filing on October 12, 2004.
COMMENT 5: VANGUARD PRIMECAP FUND (PROSPECTUS P.26)
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Comment: On page 26 of the prospectus, there is a statement that
Vanguard "reserves the right to ... redeem an account, without
the owner's permission to do so, in cases of threatening
conduct or suspicious or illegal activity." Confirm that this
policy
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Christian Sandoe
November 30, 2004
Page 3
is consistent with instances where the SEC has
expressly permitted forced redemptions. Also, confirm that the
"illegal activity" referred to in the disclosure is related
fund activity and not to other illegal activity of the
investor. For example, confirm that an investor's drunk
driving conviction will not constitute "illegal activity" that
could result in a forced redemption.
Response: We propose no change to the current disclosure. We recognize
that the disclosure provides Vanguard with a great deal of
flexibility. However, we need that flexibility because we
cannot conceive of, and therefore cannot disclose, every
illegal activity [or abusive practice] that might cause us to
reject a transaction or force a redemption. Thus, having that
flexibility is in the best interests of the fund, its
shareholders, and Vanguard employees. Of course, Vanguard will
apply that flexibility in a manner consistent with any
relevant SEC guidance.
COMMENT 6: SAI (P. B-34)
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Comment: Add disclosure to the SAI concerning the factors considered by
the Fund's board of trustees in reviewing and approving
revised terms of the Fund's investment advisory agreement with
PRIMECAP Management Company, pursuant to Item 12(b)(10) of
Form N-1A.
Response: We will include the following disclosure in the SAI concerning
the Board's review and approval of the Fund's Amended and
Restated Investment Advisory Agreement with PRIMECAP
Management Company:
VANGUARD PRIMECAP FUND. The board of trustees of Vanguard(R) PRIMECAP Fund
adopted a new advisory fee schedule for the Fund, effective October 15,
2004. The Fund's trustees regularly evaluate its investment advisory
agreement, focusing on many factors, including but not limited to, the
advisor's investment process, style consistency, performance, and the
composition and depth of the firm's management and research teams. In
deciding to adopt the new fee schedule, the trustees considered the Fund's
performance and a wide range of information relating to PRIMECAP Management
Company ("PRIMECAP"), which has managed the Fund since its inception in
1984.
The Fund's trustees retained PRIMECAP under the terms of an Amended and
Restated Investment Advisory Agreement. The board's decision to revise the
current advisory fee schedule was based upon its most recent evaluation of
the advisor's investment staff, portfolio management process, and
performance results. In considering whether to approve the new agreement,
the board engaged in arms-length discussions with PRIMECAP and considered
the following factors, among others:
* The board considered the benefits to shareholders of retaining PRIMECAP
as the advisor to the Fund, particularly in light of the nature, extent,
and quality of services provided by the firm. The board considered the
quality of investment management provided to the Fund over both the short-
and long-term and the firm's organizational depth and stability. The
trustees found that the Fund has grown considerably since inception and
that the portfolio
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Christian Sandoe
November 30, 2004
Page 4
management team has expanded to handle the increase in Fund assets.
The new fee arrangement will help PRIMECAP continue to attract
and retain top investment talent, and thereby enhance the organizational
depth and stability of the firm. The Board noted that although the Fund has
entered into an Amended and Restated Investment Advisory Agreement with
PRIMECAP to reflect the new fee schedule, other terms of the existing
agreement have not changed.
* The board considered the investment performance of the Fund in comparison
with the Fund's peer group and benchmarks. The trustees found that the Fund
has a superior performance record under PRIMECAP's management relative to
both the S&P 500 Index and the Fund's peer group. The Fund's investment
performance is reflected in the following table:
(Insert Performance Table Here)
* The board considered the fair market value of services to be provided,
including consideration of competitive fee rates and the fact that, after
the adjustment, the Fund's advisory fee remains considerably below that of
most of its peers. The board observed that after the adjustment, the
estimated advisory fee rate for the Fund would be 0.22%. The estimated rate
is considerably less than the average fee rate of the Fund's peer group,
which is 0.58%. The board noted that the new fee schedule is expected to
raise the Fund's expense ratio to 0.50% from 0.46% for Investor Shares and
to 0.35% from 0.31% for Admiral Shares for the current fiscal year. These
increases represent an additional $4 in fees on a $10,000 investment.
Additional data about the Fund's expense ratio, advisory fee rate, and
those of the Fund's competitors are expressed in the following table:
(Insert Advisory Fee Table Here)
* The board considered the extent to which economies of scale would be
realized as the Fund grows, including a consideration of appropriate
asset-level breakpoints in the fee schedule. By adjusting the fee through
increases in asset breakpoints, rather than increases in fee rates, the
Fund's trustees revised the fee schedule in a way that will allow investors
to realize economies of scale by holding shares of a large fund.
* The board considered whether the Fund should obtain alternative portfolio
management services and concluded that, under all the circumstances and
based on its informed business judgment, the most appropriate course of
action in the best interest of the Fund's shareholders was to enter into
the Amended and Restated Investment Advisory Agreement with PRIMECAP.
COMMENT 7: SAI (P. B-38)
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Comment: Explain how the Fund's "Proxy Voting Guidelines" address
conflicts of interest.
Response: The following disclosure concerning conflicts of interests
appears in Section IX of the policy where it states:
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Christian Sandoe
November 30, 2004
Page 5
The Board, including a majority of the independent trustees, appoints the
members of the [Proxy Voting] Committee who are principals of Vanguard, and
who have the requisite expertise to oversee proxy voting for the Vanguard
funds.
The Committee does not include anyone whose primary duties include
external client relationship management or sales. This clear separation
between the proxy voting and client relationship functions is intended to
eliminate any potential conflict of interest in the proxy voting process.
In the unlikely event that a member of the Committee believes he or she
might have a conflict of interest regarding a proxy vote, that member must
recuse him or herself from the committee meeting at which the matter is
addressed, and not participate in the voting decision.
COMMENT 8: TANDY REQUIREMENTS
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Comment: The SEC is now requiring all registrants to provide at the
end of response letters to registration statement comments,
the following statements:
- The Fund is 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 Fund 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.
Response: As required by the SEC, we will provide the foregoing
acknowledgements.
* * * * *
As required by the SEC, the Fund acknowledges that:
- The Fund is 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 Fund 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.
Please call me at (610) 503-2320 if you have any questions or further
comments.
Sincerely,
/s/ Christopher A. Wightman
Christopher A. Wightman
Associate Counsel