6
•
Fund Family Shareholder Association
paced the benchmark, returning 122.9%
versus 121.0%.
This move toward benchmark-like
returns demonstrates why I am skep-
tical of the multimanager approach.
Howard Marks, co-founder of Oaktree
Capital Management (which sub-
advises
Convertible Securities
as well
as Emerging Markets Select Stock),
recently wrote: “If your portfolio looks
like everyone else’s, you may do well,
or you may do poorly,
but you can’t do
different
. And being different is abso-
lutely essential if you want a chance at
being superior.”
With a multimanager fund, each
manager could be “different,” but it is
difficult for the end result—the port-
folio—to be all that different after all
the managers have been accounted for.
Marks also says that when you take
the chance of earning superior perfor-
mance, the risk of being different is
that you could do very poorly. To me,
that’s a given, but something that I’ve
been able to avoid over the long haul
by doing exhaustive research ahead of
time.
But it’s different for Vanguard.
Adding more and more managers to
a portfolio allows it to keep funds
open and increase assets under man-
agement—a big incentive for a com-
pany whose employees and executives
earn bonuses in part due to the com-
plex’s size. And it lessens the risk
of a fund massively underperforming.
Unfortunately, it also limits our ability
to earn truly superior returns. Again,
that’s not Vanguard’s problem, as it
simply wants to grow assets and pre-
vent asset migration away from the
firm by ensuring it can match its bench-
marks, whether small-cap, mid-cap or
large-cap.
Would I have preferred thatVanguard
close Selected Value rather than add a
third team of managers? Yes. I believe
the risk in this move is that an excep-
tional fund becomes a mediocre one.
Happily, I don’t think we are quite
VANGUARD IS AT RISK
of water-
ing-down the fulfilling soup that is
Selected Value
.
As I mentioned last month, on
March 31 Vanguard added a third
management team to Selected Value,
bringing the total number of manag-
ers on the portfolio to seven. Pzena
Investment Management will start off
small but could become a sizable factor
in the fund over time.
Selected Value, with almost $9 bil-
lion in assets, has seen consistent cash
inflows over the last year of about
$2.0 billion as many other active
funds have experienced outflows. It
seems that neither Barrow, Hanley,
Mewhinney & Strauss nor Donald
Smith & Co. (the two subadvisers
that were already on the fund) were
willing or able to take more of that
money, so rather than close the fund
to stem the inflows and keep portfo-
lio management duties under control,
Vanguard elected to hit the multiman-
ager button yet again.
Though Pzena has managed the
overseas
U.S. Fundamental Value
since May 2005, this is the third
Vanguard fund Pzena has been added
to in as many years. When
Emerging
Markets Select Stock
was launched
in June 2011, they were given respon-
sibility for a quarter of the assets.
Then in August 2012, Pzena took over
about 30% of
Windsor
’s portfolio.
Their responsibility at Selected Value
is small to begin with, as portfo-
lio managers Richard Pzena, Manoj
Tandon and Eli Rabinowich are start-
ing out with a piece of the fund’s
cash stake. But Vanguard will also
be directing “a portion of new cash
flows” their way. I would venture to
say they’ll be getting the lion’s share
of those flows.
While it will take several months
(and a new semiannual report) to see
how much of the portfolio Vanguard
hands over to Pzena, the team’s influ-
ence on the portfolio can already be
seen. The number of holdings nearly
doubled, from 67 in February to 120 at
the end of March. Despite the increase
in holdings, the percentage of assets in
the 10 largest holdings remained rela-
tively unchanged at 23% or so, which
is to be expected, since the initial Pzena
stake is small.
Pzena is a deep-value manager, and
like other managers that pursue that
strategy, their performance can run to
extremes of hot and cold. Only time
will tell if Pzena’s approach comple-
ments the existing managers, but I
remain skeptical. Jim Barrow does a
fine job by himself, and if
Windsor
II
is a lesson in the foolishness of
watering down his portfolio (see the
accompanying story on page 15), then
this broadening of Selected Value’s
manager lineup is not a positive.
The chart above plots the relative
performance of Selected Value since
Jim Barrow took the reins in March
1999 against the Russell MidCap Value
index. Jim Barrow and his co-manager
Mark Giambrone, who joined the fund
in 2002, were the only managers of
the fund until Vanguard added Donald
Smith in May 2005. During their time
as the only two chefs in SelectedValue’s
kitchen, Barrow and Giambrone hand-
ily outpaced their benchmark 121.7%
to 98.3%. Since Donald Smith’s arrival
in May 2005 through the end of March
2014, the fund has only narrowly out-
Selected Value vs.
Russell MidCap Value Index
3/00
3/02
3/04
3/06
3/08
3/10
3/12
3/14
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
rising line
= Selected Value outperforms
Donald Smith
& Co. added
to fund
▼
Jim Barrow
takes over
▼
MANAGERS
Selected Value Bulks Up
