A Vanguard of Value

02/23/2016 9:00 am EST

Focus: FUNDS

Genia Turanova

Editor, Leeb Income Performance

Some value investors invest in more mature businesses with lower growth prospects but usually generate higher current income than growth stocks, explains Genia Turanova, editor of Leeb Income Performance.

Vanguard Selected Value (VASVX)—by contrast—specializes in a different brand of value investing, one based on a principle that some stocks may be mispriced by the market.

This type of value investing might offer special rewards but carries a special kind of risk too; a risk that the market, while placing some stocks out-of-favor and pricing their shares at low valuations, is correct in its assessment.

This is where research counts. Vanguard Selected Value, rated 4-stars and gold by Morningstar, is strong in that regard.

It’s managed not by one, and not even by two, but by three separate teams of investment managers. This special way of managing the fund, in our view, reduces the risk.

The fund’s above-average long-term performance also speaks for this arrangement: the fund is in the top 16, 19, 18, 22, and 36% of its peers for the past 15-, 10-, 5-, 3-, and 1-year periods.

When we first added the fund to our roster, it had two managers. Vanguard added another—a deep-value specialist Pzena Investment Management—last year.

The two firms that have been historically managing the fund and are responsible for most of its outstanding record are Barrow, Hanley, Mewhinney & Strauss, and Donald Smith & Company.

Note that while James Barrow has stepped down from the $45.7 billion Vanguard Windsor II, he will continue to manage the Selected Value fund.

As a result of such an arrangement, the fund is invested in a relatively diversified mix of stocks (as of the latest count, it had 122, with top ten stocks accounting for about a quarter of total assets).

Recently, 82% was invested in US stocks and 9% outside of US and 9% was in cash).

The fund’s sector breakdown also differs from that of its average peer: the fund is significantly overweight in consumer discretionary and industrials and significantly underweight energy, technology, and utilities.

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