Too Many Cooks Spoil the Soup

01/12/2009 10:15 am EST

Focus: FUNDS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener, editor of The Independent Adviser for Vanguard Investors, says one fund shows the pitfalls of too much management attention.

The November announcement that Vanguard Morgan Growth (VMRGX) was once again making management changes begs the question: Do multiple managers really improve performance and/or reduce risk?

Vanguard says that Morgan Growth, the first fund to employ a multimanager format beginning in 1990, has served its shareholders well by doing so. I would beg to differ—strongly. While Vanguard can argue that Morgan Growth outperforms many of its peers outside Vanguard, within the Vanguard Group, where all funds benefit from low expenses, the case is far from proven.

Since April 1990, when Vanguard added Franklin Portfolio Associates to Morgan Growth, the fund has operated with two, three, four, and now five different management teams. November’s announcement that Franklin, the first team to be added as a “multi” manager, was being replaced by not one, but two more managers, suggests that Vanguard simply can’t make up its mind whether there are too few or too many cooks in Morgan’s kitchen.

The addition of a second and third manager wasn’t much of a benefit in Morgan’s first few years and, when Vanguard added its own management group to the fund in May 1993, Morgan had lost ground since the experiment began. Vanguard added Husic Capital to the fund two months later, bulking the fund’s team up to four separate management groups. By the time Husic was fired in February 1998, Morgan had lost additional ground against the benchmark.

Firing Husic proved a prescient move, though it wasn’t until the end of the 1990s that Morgan Growth’s performance began to perk up relative to the Russell 1000 Growth index. Diversification away from the overwhelming technology sector in the index helped a lot.

But what did Vanguard do just as performance was peaking? They hired a fourth manager in the form of Jennison Associates. And now, as the fund has once again been underperforming, it’s hired on two more managers and fired Franklin, giving shareholders five different managers to run the portfolio.
Thankfully, since the multimanager experiment began, Morgan Growth’s portfolio has not ballooned the way, say, Vanguard Explorer (VEXPX)’s has under its myriad managers. From a typical 100-stock portfolio under Wellington Management’s sole stewardship, Morgan Growth has consistently held from 300 to 400 stocks without breaching that still large number. At last report, it’s holding 346 stocks.

While the fund has recently been able to begin outpacing its benchmark, it’s clear that excellent solo managers, like those running Vanguard PRIMECAP (VPMCX), can still outperform—and by a very wide margin.

Does multiple management reduce risk? Again, it’s not at all clear. From their peaks of October 2007 through the end of 2008, Morgan has lost 44% versus the 35.3% loss for PRIMECAP and 35.8% loss for Vanguard PRIMECAP Core (VPPCX), Vanguard Growth Index (VIGRX) has declined 40.3%.

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