In the Vanguard

08/06/2004 12:00 am EST


Sheldon Jacobs

Author, Investing Without Wall Street, Five Essentials for Financial Freedom

"While most mutual fund investors know that Vanguard offers index funds, they know far less about Vanguard’s actively-managed US stock funds," says Sheldon Jacobs. "That’s a shame, as so many have performed well." Here, he reviews some favorites.

"We follow 35 actively-managed Vanguard funds and, more importantly, we recommend two-thirds of them. One reason for the large number of recommendations is Vanguard’s rock bottom costs. The average expense ratio of the Vanguard stock funds we track is 0.38% versus 1.16% for all the no-load stock funds we follow. Though Vanguard’s actively managed funds aren't unlikely to lead their peers during roaring bull markets, they generally provide superior risk-adjusted performance over time. Many have records of maintaining their shareholders’ capital during difficult markets. One reason: even the most aggressive of its managers tend to include valuation in their stock-picking method.

"Vanguard boasts especially formidable actively managed entrants in the growth-income and hybrid areas, where expense differences among funds can strongly impact relative performance. In this category, US Value (VUVLX), a so-called quantitative fund, includes three types of stocks: 1) dominant companies that appear attractively valued; 2) less dominant, more cyclical companies that appear inexpensively priced based on traditional valuation ratios; and 3) value stocks with good stock-price momentum. Select Value (VASVX) has also generated good relative performance this year and over the past few years. Select value’s portfolio is concentrated in approximately 40 mid-size companies whose stock prices appear low relative to their earnings, dividends, or other indications of value. Its manager also runs about two-thirds of the assets of Windsor II (VWNFX), which invests in a diversified mix of large dividend-paying companies with seemingly attractive valuations.

"Those seeking growth exposure within Vanguard have several options. One is Strategic Equity (VSEQX), a small to mid-size stock fund that we recommend. The fund is managed by Vanguard’s quantitative group, whose computer software tries to pick stocks like a fundamental analyst would – but without actually visiting companies. The fund’s model ranks stocks based on their valuations, earnings, and stock price momentum, and prospects for increased earnings growth. We also recommend Explorer (VEXPX), a small company fund. Vanguard split its assets among five sub-advisors, each of which manages its slice of the fund independently from the others. Three of the sub-advisors picks stocks with varying takes on traditional methods, some for faster growth, and some for moderate growth but lower valuations. The remaining two pick stocks using computer models. The fund has benefited from broad diversification. Morgan Growth (VMRAX ) also employs quantitative (60%) as well as traditional (40%) approaches. The latter portion focuses on human insight and judgment rather than computer software to find growth stocks with attractive valuations. As a result of this mixed approach, Morgan Growth offers a diversified portfolio of mid and large growth stocks, that’s more conservative than most growth stock funds."

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