by Bill Wysor | November 26, 2013 9:13 am
There’s no big secret behind the success of Vanguard funds — investor assets flock to Vanguard thanks to the company’s dedication to straightforward investing and low-cost products.
Vanguard Total Stock Market Index (VTSMX) recently became the largest mutual fund in the world — helped in large part by a rotation out of bonds and into stocks over the past few months. However, you can bet investors were drawn to the Vanguard fund over other products thanks to its bare-bones 0.17% expense ratio, too.
The simple truth is that most mutual fund companies exist to make a profit for themselves as well as investors. However, Vanguard’s structure is unique and allows it to basically offer its products at a price that reflects the cost of doing business — without showing a profit.
Investors benefit as all mutual funds are offered as no-load products, with no marketing or distribution fees charged to investors, and the funds in general tend to have low overall expense ratios.
But low cost isn’t all that Vanguard funds have going for them — Vanguard provides quality, too. Here, we look at some of the most compelling offerings of this industry giant:
Vanguard Capital Opportunity (VHCOX) represents a fine second chance for investors to access a great stock-picking team.
VHCOX was reopened this year to new investors who invest directly with Vanguard and features a low-turnover approach to growth-stock investing.
Managed by Pasadena-based PrimeCap, this Vanguard fund has changed over time, morphing from a midcap fund into a large-cap offering over the years. Still, the results have been solid, with the fund up 38% YTD and up 11% annually over the past decade, placing it in the top 4% of its Morningstar category and attracting $11 billion in assets.
As is typical with other PrimeCap products, healthcare names are prominent and represent 37% of the 123-stock portfolio, while technology holdings account for 34%. Recent top holdings include Biogen (BIIB), Amgen (AMGN), Roche (RHHBY), FedEx (FDX) and Eli Lilly (LLY).
VHCOX charges just 0.48% annually, or $48 for every $10,000 invested, and a low 9% turnover also helps minimize drag on the fund’s returns.
Vanguard Selected Value (VASVX) is dedicated to finding undervalued companies in the midcap space that have upside potential over time. Vanguard uses two managers on this fund, and with fine results. Barrow, Hanley, Mewhinney & Strauss LLC manage the bulk of assets with the firm of Donald Smith & Co. Inc. also contributing to the team.
The combination has led VASVX to 37% returns this year, and over the past 10 years, this $7 billion Vanguard fund has gained an annualized a little more than 11%, placing it in the top 6% of its Morningstar peer group.
As I have stated before, Wall Street doesn’t follow most medium-sized firms with the same intensity that they analyze larger, better-known stocks. This creates opportunity for stock-pickers and investors.
VASVX is a relatively focused portfolio that consists of just 66 stocks at present, including top holdings Royal Caribbean (RCL), Micron (MU), Omnicare (OCR), Cardinal Health (CAH) and Hanesbrands (HBI).
Vanguard Selected Value charges just 0.38% in annual expenses.
Vanguard Dividend Growth (VDIGX) is a fund that focuses squarely on solid firms that have the “ability and willingness” to grow dividends over time.
This $18.3 billion fund has been managed by Don Kilbride of Boston-based Wellington management since 2006. His style of investing is to focus on firms that are fundamentally solid businesses — not necessarily firms that simply pay outsized dividends. This leads him to companies that are growing at a moderate pace while throwing off some income for investors while they wait. These firms tend to hold up relatively well in a downturn — this fund lost 26.6% in 2008 compared to a 37% plunge for the S&P 500 that year.
Healthcare accounts for 20% of VDIGX’s 52 holdings, and consumer discretionary names take up another 17%. Mr. Kilbride prefers to own a focused group of large-cap stocks, leading to top holdings such as UPS (UPS), McDonald’s (MCD), Microsoft (MSFT), Walmart (WMT) and Cardinal Health.
VDIGX is up 29.2% YTD, and has returned an annualized 9.7% during the past decade. This performance places it in the top 4% of its Morningstar large blend category.
Expenses for this Vanguard fund are 0.29%.
Vanguard is a fund family that consistently promotes the value of its index fund offerings. However, while Vanguard Small-Cap Value Index (VISVX) is one of its lesser-known options, it continues to post solid results.
This Vanguard fund seeks out undervalued, out-of-favor names in the small-cap world; it currently holds more than 800 companies. VISVX is dedicated in large part to financials, which account for 29% of the portfolio. Clearly this fund is a good way to play the continuing recovery in this sector.
Recent top holdings include Towers Watson (TW), Genworth Financial (GNW), Hanesbrands, Jarden Corp. (JAH) and Fidelity National Financial (FNF).
VISVX is up 32% so far in 2013, and has appreciated by an annualized 10% over the past decade. As an added and unexpected bonus, VISVX pays some dividend income, to the tune of 1.9% over the trailing 12 months.
The fund has a reasonable $3,000 minimum to get started, and the same goes for VHCOX, VASVX and VDIGX. Expenses are just 0.24% annually.
For investors that prefer an ETF platform, Vanguard Mid-Cap 400 Growth ETF (IVOG) is a compelling option featuring dynamic stocks in medium-sized companies.
IVOG, which tracks the S&P MidCap 400 Growth Index, is made up of more than 200 high-growth names including Alliance Data Systems (ADS), Affiliated Managers Group (AMG), Tractor Supply (TSCO), LKQ Corp. (LKQ) and HollyFrontier (HFC).
This product is a fairly new Vanguard offering, garnering just $261 million in assets, yet results have been strong. While IVOG is tracking the market at roughly 27% year-to-date, it has returned 16.3% annualized over the past three years, placing it in the top 28% of its Morningstar category.
Expenses run a low 0.2%.
Read More: 4 ETFs to Supercharge Your Returns
Bill Wysor is the editor of The Relevant Investor. As of this writing, he was long VHCOX, VDIGX and VISVX.
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