A bit more than nine years after having closed Vanguard Capital Opportunity’s (VHCOX) doors to new investors, Vanguard flung the gates wide open on April 3 and said, “Come on back, y’all.”
Run by the best growth investors in Vanguard’s stable, Primecap Management, the new open-door policy is tempting. But before you rush the gates, be aware that the Capital Opportunity of today is far different from the fund that Vanguard shuttered in March 2004.
In fact, unless you’re dead set against owning any fund whose name starts with something other than Vanguard, you’ll do much better buying — or, if you already bought it, sticking with — Primecap Odyssey Aggressive Growth Fund (POAGX), my choice over Capital Opportunity since the day the Odyssey fund was introduced.
My continued recommendation to stick with the Odyssey fund stems from the changes that have occurred at Capital Opportunity over the past nine years, the biggest of which is the character of its portfolio. It’s a big-cap stock fund now, and not that dissimilar to Primecap or Primecap Core. The original Capital Opportunity was a small- and mid-cap stock fund. As I am fond of saying, Primecap Odyssey Aggressive Growth is the fund Capital Opportunity used to be, and will probably never be again.
I think it’s worth looking back for a moment at what has transpired since Capital Opportunity closed nine years ago. Though the fund has seen more money flow out than in, with net total outflows of $4.5 billion since closing, it is actually larger today, with $8.7 billion in assets, than when it closed at $7.5 billion. Primecap Management’s excellent returns have more than offset those withdrawals. Since closing, Capital Opportunity is up 103% through the end of March, compared to a 64% gain for Vanguard 500 Index Fund (VFINX) and a 73% gain for both Vanguard Total Stock Market Fund (VTSMX) and Vanguard Total International Stock Index Fund (VGTSX).
Click to Enlarge But excellent performance is not the story here. It’s the complexion of the fund’s portfolio. While the fund’s assets grew, what really grew was the size of the companies in Capital Opportunity. When it closed, the median company in the fund was $7 billion or so, and today it’s around $23 billion, or about three times the size. That is a big leap! (And it’s an even bigger leap if you consider that in Primecap’s first couple of years managing the fund, the median company size was around $2 billion.) By way of comparison, the average company in Total Stock Market has also grown over the period of Capital Opportunity’s closure, but only from $27 billion to $38 billion. Put simply, Capital Opportunity is now a large-cap fund and the distinctions between it and Primecap have diminished. In the chart I’ve graphed the difference in monthly performance between the two funds. Note that as Capital Opportunity grew before it was closed, differences shrank. That trend remains in place today. And while all of the Primecap-run funds have similar performance profiles, the r-squared, or relative performance, between the two funds has risen, meaning they are more similar today than they were years ago.
As an aside, I was amused to go back and read some of the comments made by supposed industry experts who were asked about Primecap Management’s decision to open a trio of its own funds. One said he believed the firm would have a tough time gathering assets, particularly because they weren’t “necessarily well known.” Really? Another said that the fund’s operating expenses, starting out at 1.25%, would be a handicap, and if Vanguard reopened its Primecap-run funds, “I don’t see any reason why someone would choose the more expensive funds.”
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.