Three Good Vanguard Values

Dan Wiener, editor of the Independent Adviser for Vanguard Investors, finds three Vanguard value funds he thinks will hold up well against the indexes.

Vanguard Dividend Growth (VDIGX) is a large-cap fund whose holdings serve as a counterpoint to more “growthy” stocks. Wellington Management’s Donald Kilbride is a value investor with a laser-like focus on companies that he feels can grow their dividends. That doesn’t mean they necessarily have big yields to start with (the dividend yield is not sumptuous, at 1.6%); it means these are companies that Kilbride believes have the will and the means to increase dividends, and as they do investors will pay a higher price for the stock.

Not surprisingly, he owns some big oils, as well as a smatter­ing of consumer stocks, and even some techs. What he doesn’t own is utilities, which are heavily regulated and hence, can’t necessarily grow their dividend streams at a fast enough pace to suit Kilbride’s tastes.

The quantitatively run Vanguard Growth & Income (VQNPX) stock fund leans toward the value side [of the Standard & Poor’s 500 index] and has a much narrower portfo­lio, working to obtain small differences in relative performance that will beat the S&P over time.

On average you can expect to earn about 0.4% per annum more in this fund, based on rolling returns, than you will in S&P 500 Index. Is that enough to make this a choice over the index fund as a large-cap compo­nent of a conservative portfolio?

Sure. The fund’s managers at Franklin Portfolio Associates have a few good tricks up their sleeves if they are able to generate returns a good 50 basis points better than the index with­out hitting shareholders with additional volatility. Multiply the difference by many hundreds of dollars and you’ll see the advantage.

Not surprisingly, Growth & Income and Dividend Growth are fairly highly correlated, as both focus on value-oriented, large-cap stocks. But their diversification benefits stem from using both a quantitative and a qualitative process to select stocks.

The primary manager on mid-cap Vanguard Selected Value (VASVX) value fund is one of the best value guys in the country: Jim Barrow, also the lead manager on Windsor II. Barrow’s number-two, Mark Giambrone, is a value investor in the same mold, and Donald Smith, who runs a bit more than 20% of the fund’s assets, is another old hand whose long-term record is extremely good. Selected Value isn’t a sexy fund, but the man­agers here will put up strong, long-term numbers without unsettling your stomach in the process.

This fund underperformed the mid-value indexes during the past couple of years, but that’s primarily due to Barrow’s apprehension about over-valued real estate investment trusts (REITs). When REITs imploded, Barrow’s warnings looked prescient. In just a few months, Selected Value has about made up all of its underperformance gap with the MSCI MidCap Value index.