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Buy, Hold, Sell – 3 Vanguard Large Growth Funds

The best growth funds handily outperform the markets. The worst are muddled by bad managment

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Vanguard Primecap Fund

Primecap185Buy. The Primecap Management team has delivered market-beating returns in the Vanguard Primecap Fund (VPMCX) over a very long stretch of time. How do they do it?

As with all of Primecap Management’s funds, this one is a growth-at-a-reasonable-price, or GARP, fund. The managers look for companies with the potential for strong earnings growth, but which are currently selling for less than comparable growth companies — most likely because there’s some negative factor influencing most investors’ perception of the company’s value. Each of the five managers is responsible for managing a sleeve of the fund. The end result of this approach is a high-conviction portfolio with 131 stocks and over one-third of the assets in the 10 largest holdings. The fund does hold some mid-caps, though by dint of its size, large-caps play a predominant role in the portfolio.

While the long-term track record is impressive, keep in mind that Primecap does not beat the market month in and month out. In fact, since the fund’s inception, it has only outperformed Vanguard 500 Index Fund (VFINX), 56% of the time on a monthly basis. But when Primecap outperforms, it more than makes up for the times it lags by a large margin.

While this fund is closed to new investors, its near-clone, Primecap Odyssey Growth (POGRX), is wide open and, because of its smaller size, is nimbler and has substantially outperformed this granddaddy since its introduction in November 2004. Through August 2013, the new fund is up 126.7% versus 104.6% for gramps.

Vanguard offers the Odyssey funds through its brokerage service, and as I have long recommended, unless taxes you’ll pay selling your Vanguard holdings are a concern, you have no excuse for sticking with the original, which is still great, but not as great. At a minimum, I’d take any distributions Primecap makes and invest them in the Odyssey fund.

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