(PUB) Investing 2015

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14 • Fund Family Shareholder Association
Are 10 Heads Better Than Seven?
WHEN U.S. GROWTH ABSORBED the assets of the failing Growth Equity, it also absorbed
that fund’s management teams. That’s why there are now five different firms and 10 (count ’em,
10!) different portfolio managers running the fund. But Growth Annuity, the virtual clone of U.S.
Growth wrapped in Vanguard’s variable annuity cloth, didn’t expand its roster, since it wasn’t
involved in absorbing Growth Equity, so that portfolio remains under the control of three manage-
ment teams of seven portfolio managers. Does
it make a difference?
Almost none. Take a look at the relative per-
formance chart to the right. Since the February
2014 merger, the fund and the annuity have
essentially tracked one another with small
month-to-month variations. (Note that the
scale on the chart is extremely tight.) Yes, it’s
been less than two years, but the additional
two management teams on U.S. Growth don’t
seem to have added any value, nor have they
taken much away, either.
I could argue that the higher expense ratio
on the annuity should give U.S. Growth the
advantage, and so the line in the graph should
be on a fairly consistent upward slope if the
two sets of teams were essentially equal in overall stock-picking skill. The fact that the team of
10 isn’t regularly outpacing the team of seven could mean that adding more managers and more
stocks to the portfolio (162 for U.S. Growth at the end of Q3 versus 115 for the annuity) doesn’t
add value.
But it’s early days, so let’s see what happens down the road. In the meantime, if you’re an
annuity investor, you have a much better growth option in the PRIMECAP Management-run
Capital Growth Annuity anyway, so you really don’t have to bother with Growth Annuity.
U.S. Growth and Growth
Annuity Are Similar
2/14 4/14 6/14 8/14 10/1412/142/15 4/15 6/15 8/15 10/15
Rising line = U.S. Growth outperforms
0.990
0.995
1.000
1.005
1.010
PRIMECAP Is the Outlier
U.S. Growth
Capital
Opportunity
Growth
Index
Morgan
Growth PRIMECAP
Social
Index
No. of stocks 162 137 370 332 128 405
Top-10 allocation 28% 36% 27% 22% 44% 24%
Top sectors
Information Tech. 34% 31% 24% 32% 33% 22%
Consumer Disc. 21% 11% 22% 23% 9% 12%
Health Care 19% 35% 14% 20% 30% 20%
Financials 9% 3% 13% 6% 6% 25%
Industrials 6% 17% 12% 9% 16% 6%
Consumer Staples 6% 0% 10% 6% 1% 11%
Top 5 stocks Google Biogen Apple Apple Biogen Apple
MasterCard Amgen Google Google Eli Lilly Google
Apple Eli Lilly Facebook Amazon Amgen Microsoft
Visa BioMarin Pharma Amazon Facebook Adobe Syst. Wells Fargo
Facebook Southwest Air. Coca-Cola Visa Google J & J
Data as of 9/30/15.
formed and generally zig-zagged
for years. After the merger I mentioned
earlier (note the big jump in assets in
early 2014), U.S. Growth zagged more
than zigged, and only about a year ago
was this amalgam of five management
teams and 10 individual portfolio man-
agers able to pull off a consistent string
of better-than-bogey months. Recently,
however, that run may have been bro-
ken yet again. We’ll have to wait to see
what happens.
The reborn fund has also been
erratic in its performance against other
Vanguard large-growth funds, except
for Morgan Growth, a sad tale unto
itself. As you can see in the second chart
on page 13, the most erratic perfor-
mance has been against PRIMECAP
and Capital Opportunity , both of
which tend to move to the beat of their
own savvy drummers. On average, the
correlation between U.S. Growth and
PRIMECAP, for instance, over rolling
three-year periods has been about 85%,
versus amuch higher 96%and 97%aver-
age against Growth Index and Morgan
Growth, respectively. Correlations are
even lower against Capital Opportunity.
Yes, over the five years pictured
here, U.S. Growth did slightly outper-
form, gaining an annualized 15.3%
compared to PRIMECAP’s 14.5%. But
this represents a single five-year period,
and as is clear, there are plenty of short
time frames when U.S. Growth under-
performed. In fact, looking at every
rolling 12-month period since U.S.
Growth came under new management,
the fund has averaged a 16.3% return,
which lags PRIMECAP’s 17.1% aver-
age. Hence, I would still go with the
team I know rather than the five I am
still getting used to.
U.S. Growth simply isn’t that dif-
ferent from the bulk of Vanguard’s
other large-cap growth funds. Take a
look at the table at the top of the page.
While its portfolio has fewer stocks
than the index funds, its allocation to
top holdings is on par with all of its
siblings except for Capital Opportunity
and PRIMECAP. And look at the
top holdings for these funds. Apple,
Google and Facebook dominate. But
the PRIMECAP Management team’s
top holdings are quite different. Clearly
we know who the outlier is and why
PRIMECAP Management has, over
time, outpaced all its competitors.
As I said, I’m going to raise my
assessment of U.S. Growth one notch
to recognize that the fund is moving
in the right direction. But under its
plethora of managers, the fund doesn’t
look that different from its index com-
petitors. You can do better, and our
allocations to the PRIMECAP team, no
matter which fund you own, have been
the right call to make. n
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