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. Although both work for Wellington Management, they maintain separate sub-portfolios and even work from different offices — Palmer down the road from Vanguard HQ in Radnor, Pennsylvania, 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 (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, they brought in David Palmer in December 2009 to calm things down a bit.
And that’s when performance, or rather outperformance, began to dissipate.
VCVLX 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 subpar compared to the 15.6% return for Total Stock Market or, say, the 16.5% return for Vanguard US Value (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, for instance, 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 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, VCVLX has averaged a 16.4% three-year return compared to 16.5% for Total Stock Market or 18.3% for U.S. Value.
So, that’s where we stand after five years. As a buy, hold and forget fund, this is probably not the best choice in the Vanguard firmament. Vanguard Chairman Bill McNabb sees Capital Value — which currently features top holdings including Merck & Co., Inc. (NYSE:MRK) and Groupon Inc (NASDAQ:GRPN) — as a “complementary” fund rather than a core holding. (McNabb, by the way, doesn’t own any shares in Capital Value, so he obviously doesn’t think the fund would complement his own holdings.)
Only one of Vanguard’s directors, Peter Volanakis, owns shares, and at something between $10,001 and $50,000 at last report, his position is the smallest of the more than 20 funds he reportedly owns.
A Contrarian Strategy
I still think Capital Value’s two managers are worth putting money with if you’re an aggressive investor who’s willing to buy the fund when it’s looking its worst and then taking some money off the top when it’s looking its best.
In fact, I modeled what would happen if you did exactly that — buying the fund in the month after its three-year performance began lagging, and selling it as performance improved.
An investor who bought VCVLX when its three-year return dropped below the three-year return of Total Stock Market, then sold the fund and bought Total Stock Market when Capital Value’s three-year return was better, would have made just six trades since the end of 2009, when both managers were fully on board. Those six trades would have netted a total return of 142.2% through the end of 2014 compared to a total return of 106.0% for Total Stock Market and 91.4% for Capital Value. That’s a whopping difference.
I can’t guarantee this will always work to your benefit, but using a contrarian strategy to invest with contrarians might be just the ticket to market-beating returns over the long haul.
Now that’s a complementary strategy.
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.
