What else is your group responsible for?
We work very closely with our portfolio managers to try to minimize the tax distribution that we have to pay to our shareholders because we’re trying to maximize their after-tax return in the fund. It’s one thing for a portfolio manager to earn a high return, but if he’s buying and selling a lot of securities and he’s generating a lot of capital gains, we’re going to have to pay that out to the shareholders, and they’re going to have to pay taxes on that. And that’s going to lower their after-tax return on the funds.
We work closely with our managers to try to maximize that after-tax return, not just the pretax return. We add value by qualifying to maintain our RIC status [the section in the IRS code that allows Vanguard to qualify for a deduction on each fund's tax return], and then paying all those dividends out for 150 different funds — 350 different classes — is another pretty big responsibility. If we were to not qualify, we would have to pay 34% income tax at the fund level, which is something we need to avoid.
What else does your group do?
We also do fund compliance. And we move all the money; there’s a money flow from shareholder to Vanguard as transfer agent and then from Vanguard as transfer agent to the fund. At any one time there might be $2 billion in the pipeline moving back and forth, from shareholder to fund in the case of a purchase, or from the fund back to the shareholder in case of a redemption. We also have a securities lending business — we lend the securities out of the funds and we earn money on that. We pay ourselves back our cost and then we return that money back to the funds. In some cases you can earn 10, 15, 20 basis points of extra return, which goes right to shareholders.
In what other ways does your responsibility differ from that of another CFO?
The level of precision [we have to meet]. The 1940 act says you have to be accurate within a penny of a share. If one of our funds is $19.16, but we report it at $19.15 or $19.17, that’s called a pricing error. We have to recover from that and make sure it doesn’t happened again. We have to see how many shareholders bought in and out at the wrong price. Did the fund gain or lose? Did the shareholders gain or lose? And we maintain some statistics on how good we are at that and how accurate we are.
Technology plays a very important role. We’re just finishing up a system project in the tens of millions of dollars to upgrade systems we use in the middle office. The interactions between portfolio managers and funds — or what we call the middle office — will be a straight-through process.