A New Start for a Struggling Stalwart
11/08/2010 1:20 am EST
Dan Wiener, editor of The Independent Adviser for Vanguard Investors, asks whether a lagging Vanguard US Growth fund has had enough of a makeover to merit a Buy recommendation.
After years and years of underperformance at Vanguard US Growth (VWUSX), as well as a veritable musical chairs of managers, AllianceBernstein was given the pink slip on October 7th.
In AllianceBernstein's place are two new teams that have joined a revamped duo at William Blair & Co., splitting US Growth's dwindling $3.7 billion in assets in thirds.
The new US Growth is, in some respects, a brand new animal, with three management teams consisting of eight named portfolio managers.
One question I always have when managers change is how the new portfolio will look. Well, Vanguard did us all a favor and told us with the release of the September-end portfolios. The new US Growth is most overweight in both the technology and finance sectors, and underweight energy and consumer staples companies, compared to the Russell 1000 Growth index.
Under the old regime, US Growth was overweighted towards tech stocks, but it was also overweighted in the health care sector. Under the new management, I expected that, at least initially, health care would be slightly underweighted relative to the benchmark.
It's a slight overweight instead. Also, as I expected, there is an overweight to financials, though not as big as my estimate. This is still a change, as the portfolio was under-represented in that sector.
As for the portfolio holdings, I don't think anyone will be surprised with the names they see in the fund given that all three managers currently own Apple (Nasdaq: AAPL)--US Growth's single largest holding under the old regime-- and Google (Nasdaq: GOOG), [number two] at US Growth. Two of the three managers also count EMC (NYSE: EMC), Microsoft (Nasdaq: MSFT), and Qualcomm (Nasdaq: QCOM) among their largest positions. Again, all three stocks were in US Growth's top ten before the change, and remain there afterwards.
Unfortunately, the new portfolio now has 60% more names in it. US Growth contained 78 stocks at the end of August and 126 at the end of September. It's too bad there's so much additional diversification under the new managers. While the new US Growth may end up doing better relative to its benchmark than the old US Growth, [it] would be almost impossible for Vanguard to hire anyone that would do worse than AllianceBernstein.
Finally, one last bit of fodder for analysis. Over at Delaware, only two of the four managers on Delaware's US Growth fund own shares in that fund—and that doesn't include lead manager [Jeff] Van Harte.
So, combine the extra stocks, the small changes to industry allocation, the lack of big holdings in existing funds, and fairly lackluster historical performance for the new managers, and I don't believe there is any compelling reason to put money into the new Vanguard US Growth.