Two Actively Managed Vanguard Winners

04/08/2009 11:27 am EST

Focus: FUNDS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener, editor of The Independent Adviser for Vanguard Investors, likes two funds from the active side of the mutual fund giant.

At Vanguard you don't have to settle for index funds—though some of them are quite good, and of course expenses are extremely low. Vanguard also hires some exceptional active managers, and combining their talents with low operating expenses gives them a considerable advantage over the competition.

For the first half of this decade, and for much of its existence, Vanguard Growth & Income (VQNPX) has [consistently] outperformed its index fund rival, Vanguard 500 Index (VFINX). What is remarkable is not the fact that a computer-run fund that benchmarks against the index could outperform so long and so consistently, but that it appears to have lost its mojo over the past few years.

Some of this can be explained by the market's shifting sentiments. Growth & Income takes a value-leaning approach to stock-picking that has not been an easy one of late. Over the past four years, large-cap growth stocks have outperformed large-cap value stocks by about ten percentage points. During that same period, Growth & Income has underperformed the 500 Index by about four percentage points, which isn't horrible.

And why do we own the fund? With their value tilts, it should not be surprising that Growth & Income and Vanguard Dividend Growth (VDIGX) are fairly highly correlated. But they aren't perfectly correlated. As you know, I prefer Dividend Growth, but that doesn't mean Growth & Income can't show its stuff when given a bit of a push from a volatile and changing market. And owning it in concert with Dividend Growth should make our investment ride a bit less volatile. I've got my eyes on this one, however.

Smaller foreign stocks, primarily in developed markets, were on a tear for several years, and we benefited from our holdings in Vanguard International Explorer (VINEX). Run by a team from London-based Schroder Investment Management, this fund's portfolio is well diversified across industries and countries, with a few more than 200 individual holdings.

That said, the bloom has come off foreign shares, particularly smaller ones, of late, and International Explorer will face some competition for assets from the new Vanguard FTSE All-World ex-US SmallCap Index (VFSVX). I'm all for the competition, since it will [give] this fine management team a smaller, more flexible portfolio to work with.

As I've said in the past, these managers have historically put the index bogey that the new fund will mimic to shame. Recently, relative performance has picked up again. I continue to believe the Schroder team will resurrect the fund's winning ways, though it could take a little time.

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