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The Independent Adviser for Vanguard Investors
•
June 2015
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I think is often overlooked by ana-
lysts on Wall Street, whose focus is
on large companies that can generate
the biggest investment banking fees.
Research, therefore, lags. Second, good
mid-cap companies tend to be pretty
good growers. Vanguard doesn’t have
many good actively managed mid-cap
funds.
Capital Opportunity
used to
inhabit the space, but is now too big,
and closed.
Selected Value
is a good
value-oriented mid-capper, but as it
now has a third management team, I’m
becoming wary of it losing its edge.
And
MidCap Growth
has never prov-
en to be a winner. That’s one reason
you’ll find mid-cap index funds in the
Model Portfolios
.
This is a good choice as a
Select
Fund,
but I’d bet it gets lost in the
sauce, surrounded as it is by bigger-cap
index fare.
Morgan Growth
If Explorer is the poster child
for Vanguard’s penchant for larding
up funds with too many managers,
Morgan Growth
comes in a close sec-
ond, with five management teams and
10 named portfolio managers mucking
up the works. Even Jack Bogle has
complained about the fund’s manage-
ment obesity problem.
This is one of those go-anywhere
growth funds that seems to have gone
everywhere, and nowhere. Since the
November 1997 inception of
Growth
Index
, which one could have bought
in lieu of this growth fund, Morgan
Growth’s average annualized five-year
return of 8.2% is a bit under the aver-
age 8.4% five-year return for the index
fund. Its average three-year return of
9.5% lags the index fund’s 9.9% annu-
alized three-year average. And over the
past decade, for every dollar invested
in Morgan Growth, which turned into
$2.31, that same dollar in Growth Index
grew to $2.40.
As for managers aligning interests
with shareholders, Paul Marrkand at
Wellington is the only portfolio manag-
er on the fund with any money invested
here—he’s got more than a million dol-
lars in Morgan Growth. As for the other
nine managers, not a single one has a
dollar in the fund. As for Vanguard’s
directors, Chairman Bill McNabb is
the first to have put money here—and
he only added an account in 2014. His
stake: Somewhere between $10,001
and $50,000—a pittance, by his stan-
dards, as he generally has more than
$100,000 in the funds he owns.
Morgan Growth is no “select”
fund, in my book. Vanguard’s best
growth funds, run by the PRIMECAP
Management team, are, as you know,
closed to most new investors. But that
doesn’t mean you should then recom-
mend a has-been. Morgan Growth was
once a good fund. It isn’t any longer.
SmallCap Index
Rounding out the index fund
offerings in all capitalization levels,
SmallCap Index
is an obvious filler for
the
Select Funds
, since it can be used
with MidCap Index and 500 Index to
tilt allocations across the market spec-
trum if you aren’t simply going to buy
Total Stock Market.
SmallCap Index began life as an
actively managed fund, but was turned
into an index fund in 1989, tracking the
Russell 2000 Index. It later transitioned
to the MSCI SmallCap 1750 Index in
2003, and then again to the CRSP U.S.
Small Cap Index in 2013.
Many of Vanguard’s directors own
shares in this fund, though at last report
manager Michael Buek did not.
Again, the question is whether you
are going to be an indexing purist and
simply buy Total Stock Market for your
domestic stock exposure, or mix and
match among the various index offer-
ings that Vanguard has “selected.”
Strategic Equity
This Vanguard-run quant fund is
not currently listed as a
Select Fund
(though Vanguard says it reserves the
right to change its
Select Fund
lineup),
but it’s a common component of portfo-
lios built by Vanguard’s asset manage-
ment group for clients paying fees for
portfolio management. That’s why I’ve
included it.
Since this is pure Vanguard—
designed byVanguard, run byVanguard,
and recommended by Vanguard—let’s
take a look at whether Vanguard is eat-
ing its own cooking. First off, not one of
the three managers responsible for this
fund (and the computers that drive it)
owns shares. Nor do any of Vanguard’s
directors, except Mark Loughridge,
who made his first purchase just last
year. So, when Vanguard recommends
this fund to fee-paying clients, those
clients aren’t eating from the same table
that’s feeding most of those responsible
for the fund’s performance.
Now, on to the fund. When intro-
ducing the fund almost 20 years ago,
Vanguard’s founder Jack Bogle said
Strategic Equity
(which was originally
dubbed Horizon Aggressive Growth)
would be a “Fidelity killer,” mean-
ing it was going to run performance
circles around the growth managers at
its Boston rival. It didn’t exactly work
out that way, however.
The fund could be called a SMID, or
small-cap/mid-cap, fund. It’s had a cou-
ple of benchmarks over the years, but
you’d probably want to compare this to
Extended Market Index
, which is the
small-cap/mid-cap complement to 500
Index that’s been around since 1987.
And on that score, Strategic Equity has
run both hot and cold.
You can see in the top left chart
on the next page that Strategic Equity
has had some bouts of terrific relative
performance against Extended Market
Index and some weak periods, as well.
Yes, the fund has outperformed by
almost 30% overall. A dollar invested
in Strategic Equity at inception would
have grown to about $8.19 by the
end of May 2015. That same dol-
lar in Extended Market Index grew
to $6.37. That’s not bad, but the ride
was anything but smooth, and inves-
tors would have to have had stomachs
of steel when the fund churned out a
59.0% decline during the financial cri-
sis. Extended Market Index, by com-
parison, lost 52.9% during the same
period, but took less than half as long
as Strategic Equity to recover that loss.
That’s probably one reason the fund
didn’t grow at all for about four years,
despite putting up decent returns. Only
as Vanguard has begun putting the fund
into client accounts, and investors
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