Dan Wiener, editor of The Independent Adviser for Vanguard Investors, tells why he’s wary about a Vanguard fund that has posted spectacular gains this year.

Vanguard Capital Value (VCVLX) has been on fire this year, up [70.5% through Friday]. While the economy and the markets are still in recovery, a perfect time for the deep-value, contrarian style that has been Capital Value's hallmark, Capital Value under manager Peter Higgins is nothing like the fund under either of his predecessors.

To say that Higgins is the antithesis of the long-term buy-and-hold investor would be a vast understatement. Turnover on the fund has soared. Vanguard calculates that over the first six months of the fund's current fiscal year, turnover ran at an annualized rate of 413%. Classic value funds Vanguard Windsor (VWNDX) and Windsor II (VWNFX) have reported annualized turnover rates of 54% and 43% for their latest fiscal periods.

[Also,] Higgins is not buying traditional value fare like high-dividend-paying utilities. What strikes me about some of the companies he's bought and sold over the year since he took on the fund's management is that many are similar to companies bought and held by the [growth-oriented] PRIMECAP Management team—FedEx (NYSE: FDX), Potash Corp. of Saskatchewan (NYSE: POT), and Texas Instruments (NYSE: TXN), for example.

So, is this a value fund with a growth bias, or a growth fund with a deep value bias? I think it's a growth fund run by a value manager who has his own definition. Higgins operates outside the box.

Capital Value and Higgins have lots of momentum behind them, and "hot hands" can stay hot. [But] if lots of money pours into the fund, which currently has about $700 million in assets, it may be a whole new ball game. His rapid trading skills may work when he's watching over $1 billion, but what about $2 billion or $3 billion? That's a big negative.

Vanguard is extremely afraid of "hot money" pouring into the fund once it begins to hit investors' radar screens, and they don't want any added publicity pouring fuel on the fire. But when the 2009 year-end fund listings are released, it's almost certain that, barring a catastrophe, Capital Value is going to appear in a bunch of magazines and newspapers, spurring fund chasers.

And I'll be crowning the October Hot Hands fund at the end of this month and our annual Hot Hands fund at the end of December, and Capital Value is looking like it's got a lock on both.

In the meantime, I am convinced Vanguard is going to close this fund—sooner, rather than later. Of the $700 million in the fund, $200 million arrived over the past four months alone. And that's just the beginning.

[So,] here's my advice: Buy a little. With a relatively small $3,000 minimum, you can at least stake a claim to the fund. But I certainly wouldn't make Capital Value more than a 5% position in my portfolio. (Editor's Note: On Friday, Vanguard did indeed close Capital Value to new investors for a "cooling-off" period.)

Subscribe to The Independent Adviser for Vanguard Investors here…