The Independent Adviser for Vanguard Investors
•
April 2014
•
7
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800-211-7641
SMALL CAPS
ExplorerValue Stays Small
OPEN UP THE TAP,
and you expect a
rushing flow—not a steady dribble.
But a dribble is exactly what
Vanguard’s gotten since twisting the
handle at
ExplorerValue
.
On April 3, 2013, Vanguard
announced it would make Explorer
Value available to institutional clients
investing directly with Vanguard. As
ChairmanBillMcNabb put it, “We are
confident that the fund can accommo-
date additional assets.”
Just one thing: There hasn’t been
much to accommodate. Since the fund
openedwider, inflowshaveheld steady,
and small, with less than$10million in
newmoney coming into the fund each
month. At the end of February, assets
stood at $281 million. Given perfor-
mance inMarch, assets probably stood
around $284million at quarter’s end.
And performance may be the rub
here. As you know, I’m no fan of
overmanaged mutual funds with port-
folios divvied up amongmultipleman-
agement companies who often further
divide assets among multiple portfolio
managers. In Explorer Value’s case,
we’re talking about three firms with
about equal portions of the portfolio
overseen by seven different “named”
portfolio managers. That’s a lot of
cooks stirring the pot.
WhileExplorerValue is still relative-
lynew, havingbeenaround for just four
years, you can see in the chart below
that performance has been mixed. On
theonehand, the fundhasoutperformed
its Russell 2500 Value Index bogey as
well as the age-old
SmallCap Value
Index
. On the other, it hasn’t been able
to match the performance of either its
growth-oriented big sib,
Explorer
, or
the value-oriented
Strategic SmallCap
Equity
, run byVanguard’s quant team.
So, the basic question is, “What’s
the value added (pun intended) in buy-
ingExplorerValue?” I’mnot sure there
is any—or at least it hasn’t shown any
as yet. Remember, Vanguard and the
managers determine the benchmark
against which they’ll be measured.
But investors don’t necessarily use that
same benchmark as part of their own
criteria when selecting a fund. The
fact that Explorer Value has beaten its
benchmark todate is fine, but not a suf-
ficient reason to buy it. I’mmaintain-
ingmy “Hold” rating, with a hope that
the active managers will pick up their
pace a bit. But I’m not recommending
the fund.
n
ExplorerValueVersus...
3/10
9/10
3/11
9/11
3/12
9/12
3/13
9/13
3/14
0.90
0.92
0.94
0.96
0.98
1.00
1.02
1.04
1.06
1.08
rising line
=E.V.Outperforms
E.V. vs. SmallCapValue Index
E.V. vs. Russell 2500Value Index
E.V. vs. Explorer
E.V. vs. StrategicSmallCap Equity
QUOTABLE
Vanguard.comDownloadsof Trouble
I ASKED, ANDYOUSPOKE—loudly. Yes, there are problemswithVanguard’s TurboTax down-
loads aswell as continuing problemswith vanguard.com. And yes, those of youwho spoke out
are aggravated, to say the least.
Not onlyare someof youhaving to resubmit tax returns you’vealready sent in to the IRS, but
thereareapparentlyother vanguard.com limitations that are causingheadaches. Onenewone I’ve
heardabout is that Vanguard’s computer systemswon’t allow you toassignapower-of-attorney
over both taxableand tax-deferredaccounts. According tomy correspondent, “My Flagship rep indi-
cates that he’s let the ITdepartment knowabout this, but so far it is still incorrect.”
As I have said again and again, the computers at Vanguard are far from perfect. I’ve hadmy
own issues of late. So, in all matters electronic, “Trust, but verify.”
QUOTABLE
EmergingMarketsExpensive
RICHARD PZENA, head of the eponymous value firm that runs a piece of
Windsor
,
Emerging
MarketsSelect Stock
and the non-U.S. fund,
U.S. Fundamental Value
, andwas recently
named to
SelectedValue
, says emergingmarkets are still expensive.
According to a report on an investment conferencewhere Pzena spoke, he said that even the
stocks that he likes in the emergingmarkets—companies benefiting from the growth of the
middle class—haven’t gotten cheap enough, and that he prefers European stocks over those in
the emergingmarkets.
I’m always impressedwhen amanager can actually say something negative about the sector
inwhich he is investing, because somanymanagers simply lay out the bullish case for their
funds or strategies nomatterwhichway the valuationwinds are blowing. I should note, by the
way, that Pzena himself is not listed as a portfoliomanager on EmergingMarkets Select Stock,
but I’m sure his opinions inform some of the discussions at his firm.
Since its inception in June 2011, EmergingMarkets Select Stock has outperformed
EmergingMarkets Index
,
gaining 1.4% versus the index fund’s 8.5% loss. Pzena
InvestmentManagement runs about one-quarter of the activelymanaged fund’s $250mil-
lion in assets.
