Finding Value at Vanguard

03/10/2010 1:00 pm EST

Focus: FUNDS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Daniel Wiener, editor of The Independent Advisor for Vanguard Investors, finds a well-run Vanguard value fund that manages to beat the indexes consistently.

With total invested assets of more than $350 billion, Vanguard's growth and income portfolios could be a fund family all their own. This group is the home to a slew of Vanguard's largest and most prominent index funds like Vanguard 500 Index (VFINX) and Vanguard Total Stock Market (VTSMX), and actively managed funds like Vanguard Windsor (VWNDX) and Vanguard Windsor II (VWNFX). In fact, the index funds in Vanguard's growth and income group hold more than 80% of all the assets invested in the group.

Vanguard would have you believe that the efficient market is alive and well and that investors looking for the kind of large-cap, high-quality fare that its growth and income funds provide don't need to search beyond the aforementioned index giants or some of the more focused index options. How wrong they are.

Despite what the index purists say, though, Vanguard's actively managed funds put its growth and income index products to shame. How is it that these actively managed funds seem to outwit the low-cost, well-diversified, manager-less index funds that the purists claim are superior to all comers? Easy. Each of these managed funds has a diversified portfolio and low operating expenses just like an index fund. But the secret weapons are the managers.

[For example,] over the past decade, [Windsor II] managed to outperform the Standard & Poor’s 500 index by margins of 4.9%, 3.5%, and 3.6% per annum. Not bad. Now, you might argue that value stocks of the type that Windsor II and Windsor focus on were the place to be during the past decade, and you would be correct, despite the fact that growth stocks were the darlings early in the period as the tech bubble grew and value stocks were the dogs late in the decade when banks imploded.

Windsor II is a good, solid value fund. However, as Vanguard keeps adding managers here (they just added a sixth, Sanders Capital, in January), it's tough to figure out what the real value is. Luckily, for all the messing around Vanguard has done, they've left Jim Barrow to continue managing about two-thirds of the portfolio. But Barrow is much better alone in the kitchen than when he has to share duties with lots of sous chefs. His Diversified Value Annuity, despite higher expenses, continues to outperform Windsor II.

That being said, Windsor II's relative performance has improved since the multiple changes that took place in 2007, so maybe there's hope yet. This is a fine, if unexceptional, fund in its current incarnation.

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