The Independent Adviser for Vanguard Investors
•
February 2016
•
7
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HAS VANGUARD FINALLY
figured out
what I’ve been saying for years, that
too many cooks spoil the multimanaged
fund broth?
In early January, Vanguard reduced the
headcount on both
Explorer
and
Morgan
Growth
, two of the poster-children for
excessive multimanagement. This is
good news for the funds’ shareholders.
But I don’t think they went far enough.
Vanguard continues to claim that throw-
ing lots of different management teams at
a single portfolio is smart active manage-
ment, but I beg to differ.
In the latest manager musical chairs,
Century Capital Management was fired
from Explorer and leaves the Vanguard
fold, while Kalmar remains a manager
on Explorer but has been relieved of its
role on Morgan Growth.
This reduced the headcount on
Explorer to seven management teams
made up of 15 individual portfolio man-
agers, while Morgan Growth will now
be served by four teams totaling eight
portfolio managers.
Vanguard says that the multimanager
format, which it first adopted in 1987,
“can reduce portfolio volatility, provide
potential for long-term outperformance,
and mitigate manager risk.”
I’d say they are batting, at best, one
out of three.
Let’s take performance.Two charts tell
the tale here. The first shows Explorer’s
relative performance against its Russell
2500 Growth index benchmark. The
persistent downtrend confirms what I’ve
been saying for some time.
You can pretty much say the same
thing for Morgan Growth. While its
performance lately has mimicked the
Russell 3000 Growth index, that’s little
comfort for its shareholders. You can see
that as Vanguard kept adding manag-
ers, performance suffered. Why bother
investing here?
As for multiple managers reducing
risk, Vanguard might want to talk about
betas and standard deviations and all
that market mathematics, but I think
we should use a simple metric, one that
really relates to shareholder experience:
Maximum Cumulative Loss (MCL), or
drawdown.
During the 2008–2009 financial cri-
sis, Explorer investors suffered a 52.4%
loss over 16 months ending in February
2009. It took 24 months for the fund’s
managers to recover that loss. SmallCap
Growth Index suffered a 53.5% loss over
the same period and took 22 months
to recover. Is the difference between a
52.4% loss and a 53.5% loss really risk
management? And given the fact that the
index fund recovered faster, I’d say that,
at best, the two funds came to a draw.
As for Morgan Growth, the fund’s
shareholders lost 50.3% during the finan-
cial crisis over 16 months. That loss
was recovered in 37 months. Extended
Market Index investors lost a bit more,
52.9% over 21 months, but recovered
much quicker, taking 22 months. Again,
is the difference between a 50.3% loss
and a 52.9% loss worthy of the claim
that multimanagement reduces risk? One
could counter that the index fund’s faster
recovery more than outweighs the ben-
efits of the slightly smaller decline.
As for the final “benefit” of multi-
management, the reduction of “manager
risk,” well, that’s kind of obvious, isn’t
it? If Vanguard doesn’t hire managers
who all invest in the exact same stocks
and in the same fashion, and they hire a
bunch of them, then
ipso facto
, you can
claim lower manager risk. But what’s the
benefit?
I should note that at the end of 2014
(the last year for which data is available),
only two of Vanguard’s nine directors
owned shares in Explorer, and only one,
Bill McNabb, owned shares in Morgan
Growth (and not too many, at that). So,
Vanguard’s directors really don’t have a
lot of skin in the game when it comes to
these two multimanaged messes.
Vanguard needs to do more to reduce
the head-count on its multimanaged
funds. Shareholders have mutinied, as
neither fund has seen investor inflows
in any of the last seven calendar years,
a record only matched by
Growth &
Income
,
Windsor
and
Windsor II
, all
of which are domestic stock funds, open
to new investors and multimanaged.
I will give Vanguard credit for tacitly
admitting they’ve gone overboard.
On the Other Hand
While Vanguard was cutting manag-
ers at Explorer, in another announce-
ment it added two portfolio manag-
ers from Arrowpoint Partners to
Small
Company Growth Annuity
. This
small-cap growth annuity is only run
by a fraction of Explorer’s managers
and has outperformed the more man-
ager-laden fund, which to me is further
evidence that adding managers doesn’t
improve performance. We’ll have to see
if the addition of Arrowpoint sharpens
the annuity’s returns, or dulls them.
n
MULTIMANAGERS
Vanguard Trims Its Ranks
Explorer vs. Russell 2500
Growth Index
12/05
12/06
12/07
12/08
12/09
12/10
12/11
12/12
12/13
12/14
12/15
Rising line = Explorer outperforming
0.80
0.85
0.90
0.95
1.00
1.05
Firm hired
Firm fired
Morgan’s Many Managers
12/88
12/91
12/94
12/97
12/00
12/03
12/06
12/09
12/12
12/15
Rising line = Morgan outperforming Russell 3000 Growth Idx.
Roll &
Ross fired,
replaced by
Vanguard
internal
▼
Morgan's
first two
multimanagers,
Franklin and Roll
& Ross, added
▼
▼
Husic
added as
fourth
manager
▼
▼
Kalmar
and Frontier
replace Franklin.
Morgan now has
five management
teams.
Jennison hired as
fourth team
Husic
fired
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
▼