We've made several changes in our model portfolio to increase our margin of safety amid the market v...
Dumping a Vanguard Dud
06/10/2009 11:00 am EST
Dan Wiener, editor of The Independent Adviser for Vanguard Investors, says goodbye to a once-stellar Vanguard global fund, and he analyzes where it went wrong.
I've finally given up on Vanguard Global Equity (VHGEX) after years of hanging in and watching Vanguard slowly eviscerate this once-excellent global stock fund though the addition of one new manager after the next. In the beginning, Global Equity was a true stock-picker's fund, run by a trio of excellent managers at Marathon Asset Management in London.
In its glory days, Marathon typically held 320 to 330 stocks in Global Equity, and about 10% of assets were held in their 10 favorite stocks. After our  purchase, the managers nailed a huge year, with a 44.5% gain, bettering the Standard & Poor’s 500's 28.7% gain and the EAFE's 38.6% rise. The fund continued strong in 2004, matching the EAFE and walloping the S&P 500. So, messing with success, Vanguard reopened the fund in October of that year, adding a second manager.
You can guess what happened. Nine months after reopening the fund had doubled in size, and the portfolio had grown to more than 500 stocks. With assets almost doubling again, in 2006 Vanguard added AllianceBernstein to the mix and the portfolio grew to almost 650 stocks. Last year Vanguard added a fourth manager, Baillie Gifford, to the fund.
While the portfolio now holds almost 800 different stocks (and has exceeded that number on occasion), the actual concentration at the top has increased to almost 16% of assets for the ten top holdings. But even this apparent concentration at the top has a cost—the enormous number of positions in the portfolio's "tail" that dilute the managers' favorite holdings.
And it isn't as if risk has somehow been tempered. During the 2000 to 2002 global market meltdowns Global Equity put up exceptionally strong numbers. But in the current market crash, Global Equity fell 60.9%. By comparison, the FTSE index, and the performance of the index fund since inception, generated a maximum cumulative loss of -54.2%.
The fund was outperforming Vanguard Total Stock Market (Amex: VTI) consistently until the end of 2008, and was only slightly behind Vanguard Total International Stock Index (VGTSX) over the past few years. Not only that, but Global Equity was putting global indexes to shame. The picture looks good up to 2007, and then turns very, very ugly.
Do I think the addition of three managers to the original one was a bad idea? Absolutely. I have no problem with any of the new managers by themselves, but Vanguard insists on diluting its funds with multiple managers, and I can't think of too many instances when this has ultimately worked in shareholders' favor.
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