UPDATE 3-Vanguard dumps MSCI indexes from 22 funds to cut costs
* Vanguard transfer affects index mutual funds, ETFs
* Vanguard says $537 billion of assets will be switched
* MSCI says switch covers $24 million of annual operating income
(Adds additional MSCI comments, updates stock price)
Oct 2 (Reuters) - Vanguard Group, the largest U.S. mutual fund manager, said on Tuesday it was switching 22 of its biggest index funds away from benchmarks provided by MSCI Inc in order to cut costs.
Shares of MSCI plunged 30 percent to $25.21, the lowest in over three years, on the news that one of its biggest index licensing customers had defected.
Vanguard's move comes as other managers of index funds are also moving to cut costs. Charles Schwab said last month that it was trimming fees on its line of exchange-traded funds to as little as 0.04 percentage points a year while BlackRock , the top ETF manager, has said it plans to announce price cuts soon.
Vanguard said it would shift six international stock funds with $170 billion of assets to track indexes from the FTSE Group. And 16 U.S. stock and balanced funds with $367 billion of assets will switch to indexes developed by the University of Chicago's Center for Research in Security Prices.
The change affects both mutual funds and exchange-traded funds, Vanguard, based in Valley Forge, Pennsylvania, said in a statement.
"We negotiated licensing agreements for these benchmarks that we expect will enable us to deliver significant value to our index fund and ETF shareholders and lower expense ratios over time," Gus Sauter, chief investment officer at Vanguard, said in a statement.
MSCI said the switch is expected to be phased-in over a number of months starting in January 2013 and covers Vanguard funds that generated annual revenue and operating income of about $24 million from licensing fees. The New York-based firm reported operating revenue of $901 million and operating income of $322 million in 2011.
But MSCI chief executive Henry Fernandez could do little to assuage investors' over fears that other customers might follow Vanguard's move. MSCI shares, already down over 20 percent in morning trading, dropped another 5 to 8 percentage points during a 45-minute conference call Fernandez held with analysts.
ETF managers' choice of index provider "may not be as sticky as we all thought," Fernandez said on the call. Later, he explained that despite long-term licensing contracts, ETF managers could still switch indexes in "relatively short periods of time."
Still, BlackRock, which has been losing ETF market share to Vanguard for several years, said it was sticking with MSCI indexes on its iShares family of funds.
"MSCI is the gold standard of global and international equity indexes - the near-universal choice of professional investors," Mark Wiedman, global head of iShares, said in a statement. "We plan to deepen our partnership with MSCI to help deliver the highest quality products and portfolio construction to our clients."
Shares of BlackRock declined 2.1 percent to $176.02. The firm has already said it plans to cut prices on some ETFs that compete most directly with large Vanguard funds. Now BlackRock faces the prospect of Vanguard reducing its fees even more.
Vanguard's decision follows a similar move it made in 2003 to dump higher-cost indexes provided by McGraw-Hill Co's Standard & Poor's unit in favor of the MSCI benchmarks.
The new indexes may be somewhat inferior at tracking market results but will lower Vanguard's costs and the savings will be passed on to investors, said Daniel Wiener, the editor of "The Independent Adviser for Vanguard Investor" newsletter.
"Indexing, particularly through ETFs, is going to get cheaper and cheaper," Wiener said. "Vanguard is not going to let someone else, be it Schwab, iShares or any of its other competitors take the mantle of 'lowest cost' from its shoulders."
(Reporting by Aaron Pressman; editing by John Wallace, Theodore d'Afflisio, Kenneth Barry and M.D. Golan)
Keywords: VANGUARD INDEXES/