Scanning the active funds available to investors, the oldest fund, Vanguard Explorer Fund (VEXPX), is watered down by six different management teams. Two, Vanguard Strategic Equity Fund (VSEQX) and Vanguard Strategic Small-Cap Equity Fund (VSTCX), leave the stock picking to the computers. Vanguard Mid-Cap Growth Fund (VMGRX) suffered for years, and since its 2006 overhaul has failed to distinguish itself. Vanguard Explorer Value Fund (VEVFX) has shown promise, but, as the youngest horse in the stable, it still has yet to prove itself.
And Vanguard Capital Opportunity Fund (VHCOX), one of my all-time Vanguard favorites, stands out as a laggard in the market rebound. This is still a great fund — outperforming Vanguard 500 Index Fund (VFINX) from October 2007 to June 2013. But for years now, its large size has kept it from investing in the small- and mid-sized companies that drove its returns in the early days. It no longer packs as much punch as Vanguard’s other aggressive funds.
Capital Opportunity Still a Great Fund, Just Not an Aggressive One
Longtime readers of The Independent Adviser for Vanguard Investors know that I think the team at Primecap Management is among the best around — and I’ve put my money behind that statement for years. What sets Primecap Management apart is how it is structured.
Each of the four portfolio managers is individually responsible for investing a sleeve of Capital Opportunity’s portfolio. If one or more of the team focuses on the same stock, so be it — that company gets a larger allocation in the portfolio. This has resulted in the fund’s top-10 holdings consistently soaking up 30% to 40% of assets. And though there are typically 115 or so stocks in the portfolio, each manager may only hold 30 to 40. Focused investing is, to my way of thinking, the best kind of investing and the antithesis to indexing.
Though they make their own buy and sell decisions, the team is rowing in the same direction, and looking for companies with the potential for rapid earnings growth, but which are selling at a discount for one or more reasons. This strategy, known as growth-at-a-reasonable-price, or GARP, can mean buying misunderstood companies or companies in an apparent lull before their next big hit. But if the managers have done their homework properly (and they usually do), when a company’s fortunes turn, the stocks can take off on multi-year runs.
As I hinted at above, Capital Opportunity may still be a great fund, but it is only a decent aggressive fund. The issue is size — it’s huge. Originally it held mostly small- and mid-cap stocks, but as its assets grew over time, the fund started to own more large stocks and look more and more like Vanguard Primecap Fund (VPMCX). Vanguard closed it in March 2004. The median stock in Capital Opportunity has more than tripled in size since then, while the median stock in the stock market hasn’t even doubled in size. Meanwhile, when it closed, the fund already had $7.5 billion in assets. Today, it’s got close to $9.5 billion. It’s just too large to invest all its money in the small stocks it used to seek.
Capital Opportunity reopened earlier this year, but frankly, I wish we had the old Capital Opportunity back. I am committed to showing you how to invest solely within the Vanguard family, and will continue to do so. But since the day Primecap Management launched the Primecap Odyssey Aggressive Growth (POAGX) fund, it has been my choice over Capital Opportunity. Primecap Odyssey Aggressive Growth is the fund Capital Opportunity used to be, and probably never will be again.
The Odyssey fund is available through Vanguard’s brokerage unit, so there’s no reason (except taxes) even committed Vanguard acolytes can’t make the switch. Primecap Odyssey Aggressive Growth is my single largest personal investment — by far. For years now, I’ve added new money, and channeled distributions from Capital Opportunity into the younger, smaller fund. I recommend you do the same.
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.