New managers and new funds at Vanguard could make a BIG difference in your portfolio in 2009.
Let’s take a look at the changes they’ve made, as well as how these changes could affect your investments, starting with new funds.
Total World Stock Index Fund and ETF
Hot on the heels of its megacompetitor, Barclay’s Global Investors, Vanguard introduced Total World Stock Index (VTWSX) in June. Barclay’s iShares unit began trading a similar product, the iShares MSCI All Country World index, or MSCI ACWI, in March.
Total World Stock tracks the FTSE All-World index of about 2,800 stocks and has an expense ratio of 0.25% on the ETF shares.
By comparison, the iShares MSCI ACWI tracks a Morgan Stanley Capital International index of about 2,900 stocks and has an expense ratio of 0.35%. That gives Total World Stock a 10-basis point advantage — a distinct competitive edge among frugal ETF investors.
I believe that global stock funds, whether indexed or actively managed, are going to become the default core positions for many investors’ portfolios moving forward. For one thing, the cost of owning a global fund has come down considerably since the early days when few were offered.
This doesn’t mean I think a global fund like Total World Stock Index is the end-all, be-all for portfolio construction. But…
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it could be a worthy tool if, as with most tools, it’s handled properly.
MegaCap Index, Growth and Value
Introduced in mid-December 2007, MegaCap Index (MGC), MegaCap Growth Index (MGK) and MegaCap Value (MGV) track subsets of the index bogeys already tracked by LargeCap Index, Growth Index and Value Index. These new bogeys are the MSCI Large Cap 300 index and its growth and value subsets.
Yes, it’s confusing, because MSCI refers to this index as “Large Cap,” and the bogeys tracked by the existing Vanguard funds, which are “large-cap” as opposed to “mega-cap,” are MSCI’s Prime Market 750 indexes. We’ll just have to get used to it.
So, where’s the value in these new mega-cap funds?
Well, they allow you to create a larger capitalization “gap” in your portfolio between the biggest U.S. stocks and the smallest. This is particularly evident among the value sub-indexes, as the big companies in MegaCap Value are HUGE!
However, only a few institutional investors with specific marketcap requirements will probably need to use these index options. (There are no investor shares — only ETF shares and institutional shares.) Essentially, you have to be willing to bet on the whims of Wall Street to determine when mega-caps will do better for you than large-caps, and when the opposite will hold true.
Dividend Growth
In 2008, I recommended a subtle, but important shift in our Model Portfolios, cutting our stake in Health Care in half and adding the proceeds to our existing stakes in Dividend Growth.
I’m sure some of my Independent Adviser subscribers were surprised to see me cutting Health Care at all. After all, it’s one of my favorite funds and one we have owned for years.
I didn’t suggest that anyone cut the fund out of their portfolios entirely.
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We simply trimmed our position. It was also the first trade in the fund since we last trimmed holdings in December 2004. My subscribers and I have always been long-term investors in this and other Vanguard funds.
One reason I was interested in making this trade was so that we could add additional assets to another fund run by a top Wellington Management portfolio manager. Donald Kilbride has put some life into the mega-cap Dividend Growth.
The portfolio of just over 50 stocks is the mark of a veteran stock picker who clearly is not shadowing an index benchmark. In addition, with the transition that many health care service and pharmaceutical companies are going through now and the loss of patent protection on a slew of drugs this seemed an appropriate time to take a bit off the table in our health care focused holding.
Ok, so you’ve got the scoop on the new funds, now let’s take a look at a few of the changes to fund management.
Like it or not, the truth is that not every fund at Vanguard is a winner. The fund manager can make a huge difference in the success — or failure — of a fund’s performance. Vanguard made a number of changes at the fund manager level in 2008 that could have a positive impact on your 2009 returns.
New Managers Added to Growth Equity, Global Equity and International Growth
Scottish investment manager, Baillie Gifford, has been tapped to ride to the rescue on two Vanguard funds — one at the top of the performance pile and one at the bottom.
Growth Equity (VGEQX) is an aggressive, quantitative and qualitative growth fund started by Turner Investment Partners in 1992. It was “adopted” and folded into the Vanguard family in June 2000, retaining Turner as the fund’s manager. Since then, performance has been abysmal…
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…essentially tracking the ups and downs of the NASDAQ Composite and about matching the Russell 1000 Growth index, which is its bogey.
Vanguard’s response, apparently, is to try to tone down Turner’s aggressiveness by employing a more moderate strategy. While Turner’s bogey for its portion of Growth Equity’s portfolio will remain the Russell 1000 Growth index, Baillie Gifford will be benchmarked against the S&P 500, which by definition should be more or less neutral from a growth or value perspective.
Turner’s portfolio typically holds about 70 stocks. Baillie Gifford will own about 50. I would expect some overlap, but we’ll see how much when the fund’s portfolio numbers are finally reported.
As for Global Equity (VHGEX), with the addition of three new managers from Baillie Gifford — Spencer Adair, Malcolm MacColl and Charles Plowden — to the roster, this global stock fund now has a full dozen managers from four firms running the show.
I’m surprised that Vanguard saw the need to add a fourth manager here. The $64,000 question, of course, is whether Global Equity’s performance will begin to look more and more like that of an index fund, particularly at a time when Vanguard is introducing its first global index product, Total World Stock Index (VTWSX).
In February, Vanguard also announced that International Growth is adding a third manager — M&G Investment Management, which has run Precious Metals & Mining since its inception that month. They also took a portion of International Annuity. The managers are Graham French, who has run the metals fund since 1996, and Greg Aldridge.
I still believe International Growth is a decent, though not spectacular fund, and hope that the addition of another management team doesn’t turn it into an index-hugging foreign fund.
Up next: New Manager Added to Health Care
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New Manager Added to Health Care
Vanguard and Wellington Management are laying the groundwork for Health Care‘s Ed Owens to retire. I’m not saying Ed’s going tomorrow, but in a filing with the SEC, Jean M. Hynes, who has worked with Owens for years as an analyst covering biotech and pharma stocks and is also a co-manager on Hartford Global Health (HGHAX), a fund I recommend as an alternative to the Vanguard fund, was named “associate portfolio manager” earlier in 2008.
This is a big deal, or it will be when Owens steps down. First, it will certainly increase Hynes’ workload. While the Hartford fund had about $825 million in assets at the end of Q1 2008, the Vanguard fund held $22.8 billion.
Second, the Vanguard fund has one of the best long-term records in the entire mutual fund business, and Owens has been its manager since its May 1984 inception.
To give you a sense of just how good the fund has been, an investor who put $1,000 into Health Care at its inception and reinvested distributions would have seen this grow to more than $50,000 at the end of March.
By contrast, that same $1,000 invested in 500 Index, Vanguard’s venerable index option, would have been worth a bit more than $15,000.
Again, I can’t say when this will happen, but Owens’ retirement will be as big news for many investors as John Neff’s decision to retire from Windsor at the end of 1995. My readers and I will be watching carefully.
It’s part of my job at the Independent Adviser for Vanguard Investors to keep an eye on the fund managers and the decisions they are making for you. Try it out for yourself, risk-free. Click here to learn more.
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