In the Vanguard

04/29/2005 12:00 am EST


Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

"I buy managers, not funds," notes Dan Weiner, the advisory industry's leading authority on Vanguard funds. "In building my model portfolios, I scour Vanguard’s line-up for the best and brightest managers." Here, he discusses some of his current favorites.

"I look for funds with the greatest long-term potential, seeking the ideal combination of diversification, risk, and reward for each of their purposes. Most of the funds in the portfolios are ones I’ve recommended for years. Many are funds I foresee holding and recommending for many more to come, as they are chosen because they consistently provide market-beating returns with less-than-market risk—a winning combination in any investor’s playbook.

"Vanguard Growth & Income (VQNPX ) tracks the S&P 500 but adds a value-oriented approach to selecting stocks both from within and beyond the index. While that doesn’t guarantee that Growth & Income will beat the index every year, that’s just what’s happened since 1998. The long-term numbers back this up, with Growth & Income showing better returns over three-, five- and ten-year periods through the end of February and better returns over multiple rolling periods. The fund serves as a solid foundation in the large-cap stock arena.

"Whenever I talk about funds to hold for the long-term, Vanguard Health Care (VGHCX ) is one of the first names off my lips. Why? We’re all getting older and the population bulge is moving inexorably into its peak health care consumption years. Add to that the fact that manager Ed Owens has a long-term track record of outstanding performance and has built a formidable team to assist him. Health Care is a large, extremely well-diversified fund covering major drugs, biotechs, service providers, and medical technology companies both here and abroad. I love this fund and think it makes perfect sense to invest in industries that have long-term trends working in their favor.

"Vanguard GNMA (VFIIX ) can function as a high-yielding alternative to money market funds so long as you’re comfortable with some capital risk. This fund, still the largest in the government mortgage bond market, is as good as they get with its low expenses and high returns. And manager Paul Kaplan keeps risk low in the fund by avoiding the highest yielding and more risky GNMA bonds. If I was forced to pick a favorite among Vanguard’s bond offerings, this fund may well be it. GNMA gives us a good yield—5.10% at month-end—with low interest-rate risk, lower overall risk, and a comparable performance record. That makes it a winner in my book.

"By sticking with the short end of the yield curve, we avoid a lot of the interest rate risk that one takes on with longer-term funds. Now that we are in a rising rate environment, I see Vanguard Short-Term Investment-Grade (VFSTX ) as one of the best choices among Vanguard’s bond funds for the coming year. Even if times get tough, this fund should roll through it with minimal damage. The fund recently provide a current yield of 3.51. Short-Term Investment-Grade provides a buffer in our portfolios against declines in stock prices, while earning a bit of yield, and return over time."

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