Buy at the Worst, Sell at the Best

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After a decade fraught with manager turnover and miscues, it appears that, in at least one respect, Vanguard Capital Value Fund (MUTF:VCVLX) is on a steady course.

December marks five years since David Palmer was added to this go-anywhere contrarian fund as a co-manager with Peter Higgins. Though both work for Wellington Management, they maintain separate sub-portfolios and even work from different offices — Palmer down the road from Vanguard headquarters in Radnor, PA and Higgins in Boston.

Yet, while the manager musical chairs have stopped, so has the fund’s relative outperformance. Take a look at the chart below. In it I’ve compared Capital Value’s performance to its benchmark, the Russell 3000 Value index, as well as Vanguard Total Stock Market Index Fund Investor Shares (MUTF:VTSMX).

You can see that from the time Peter Higgins was brought in to replace former manager David Fassnacht in June 2008, the fund has definitely put up better numbers than the index and the index fund. Yet, because Capital Value’s volatility proved too great for Vanguard’s executive branch, Vanguard brought in David Palmer in December 2009 to calm things down a bit.

20150202 Vanguard

And that’s when performance, or rather outperformance, began to dissipate. The fund outperformed for a while, then underperformed for a while longer, then outperformed again. But early in 2014, the tide turned once more, and at the end of 2014, the fund’s five-year annualized gain of 13.9% was sub-par compared to the 15.6% return for Total Stock Market or, say, the 16.5% return for Vanguard U.S. Value Fund (MUTF:VUVLX), another value-oriented fund.

Now, in fairness, Capital Value doesn’t really have a good Vanguard fund to compare it with given its deep-value orientation. Peter Higgins, in particular, is an eclectic investor with nerves of steel who is willing to tread where others fear in search of values. Sometimes that works wonders.

Note the fund’s whopping outperformance between late 2008 and late 2009 — a run that forced Vanguard to close the fund as money began to flow in by the bucketload. Capital Value gained 81.5% in 2009 alone. Palmer’s style is a bit more sedate but still oriented to finding undervalued companies that may be a bit unloved. Unfortunately, there are many times when the fund’s go-anywhere mandate doesn’t pay off for shareholders.

So, depending on when you want to start your measure of Capital Value’s performance, you can find periods of tremendous relative gains, and others that aren’t so hot. Vanguard uses a rolling, three-year period to determine whether a manager’s performance deserves a bonus or a give-back. Beginning three years after Palmer came aboard, the two managers have, together, been dinged a lot more money than they’ve earned in bonuses.

When you look at rolling three-year periods beginning in December 2012, of which there have been 25, Capital Value has averaged a 16.4% three-year return compared to 16.5% for Total Stock Market or 18.3% for U.S. Value.

Daniel P. Wiener is editor of 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.


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/buy-worst-sell-best/.

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