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Three Good Vanguard Values
03/10/2008 12:00 am EST
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.Subscribe to The Independent Adviser for Vanguard Investors here…
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