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Fund Family Shareholder Association
www.adviseronline.comhave been fixtures in the
Model
Portfolios
for almost 17 years.
It turns out those original purchases
were darned good for us. From the first
purchase in the
Growth Model Portfolio
through March 2016, Selected Value
returned 332.5%, more than three times
the return of
500 Index
, which gained
108.6%. It was the fifth-best Vanguard
fund, not counting sector funds, over
that period.
Selected Value also tripled the index
fund’s return between the time we first
put it into the
Conservative Growth
Model Portfolio
and the end of March.
In fact, only
REIT Index
outperformed
over that period, so Selected Value was
the single best-performing diversified
stock fund in the Vanguard stable at
the time.
And that’s the rub—at the time.
Since those first purchases, Vanguard
has monkeyed around with Selected
Value’s manager lineup, adding Donald
Smith & Co. in May 2005 and Pzena
Investment Management in March
2014, and they’ve also offered up more
options in the mid-cap value space.
While I’m a very patient investor, I
think it’s time to move on—17 years is
a long time, so you can’t say I’m mak-
ing a rash decision. But Selected Value
has lost its appeal.
Of course, if you started follow-
ing the newsletter after my initial rec-
ommendation to buy Selected Value
(as many of you have), your returns
aren’t going to match the numbers I
quote above—every investor’s experi-
ence is going to be unique. I share
those numbers to show that Selected
Value has been a long-term winner,
but as we’ll see, may not be the ideal
pick for the next 17 years. While I’m
selling Selected Value from the
Model
Portfolios
, I’m switching my rating on
the fund to a
Hold
from a
Buy
in recog-
nition of the fact that some of you will
continue to hold onto it because of your
long-term gains and, frankly, because
the fund remains good enough that
there may come a time when we want
to purchase it again.
When might that be?Well, one reason
for Selected Value’s periodic underper-
formance has been its managers’ avoid-
ance of real estate investment trusts, or
REITs. As I’ve shown you in the past,
REITs have had a significant impact on
the performance of the mid-cap value
indexes. Their decline during the finan-
cial crisis was one reason Selected Value
did so well then, on a relative basis.
Should interest rates begin rising sub-
stantially and income proxies like REITs
and utilities lose steam, we might see
Selected Value surge ahead. Jeff and I
will keep our eyes open for that.
Buying Past Performance
What’s fascinating about Vanguard’s
muddling with management at Selected
Value is that, on the surface, the addi-
tion of managers like Donald Smith &
Co. and Pzena Investment Management
should have been a net positive to
the fund, given the companies’ track
records. Both firms’ mid-cap value
strategies have outperformed Selected
Value over their lifetimes. However,
despite the fact that the two newest
managers have strong long-term track
records, they haven’t had the right stuff
since joining the Selected Value team.
How do I know this? First off,
Vanguard doesn’t break out individual
managers’ performance, so you have to
do some digging. But both Donald Smith
and Pzena manage separate accounts in
the mid-cap value style. While there may
be some variation between what they do
in their separate accounts and what they
do for Selected Value, it can’t be vastly
different. Vanguard wouldn’t hire an
outside manager based on one strategy
and then force them to alter it drastically.
Yes, Vanguard will sometimes ask that
portfolios be slimmed down to “best
ideas” or that risk be toned down a
notch, but essentially they hire managers
to do what they have always done. I feel
the comparisons are apt.
Unfortunately, the historical outper-
formance Vanguard might have thought
it was buying just hasn’t presented
itself in the favor of Selected Value’s
shareholders.
Since coming aboard Selected Value
in May 2005, Donald Smith & Co.’s
mid-cap value strategy has underper-
formed Selected Value, which means
Barrow and Giambrone have outper-
formed. However, both underperformed
MidCap Value Index
.
Pzena has only been on the fund for
two years, but in that short time, while
the Pzena mid-cap value strategy out-
performed both Donald Smith & Co.
(which lost money in an up market)
and Selected Value, it still lagged the
index fund.
Take a look at the charts below.
(Note all the charts are reset to start at
Selected Value Hasn’t
Provided Good Value
3/00
3/02
3/04
3/06
3/08
3/10
3/12
3/14
3/16
Selected Value (Barrow)
MidCap Value Index
Donald Smith MidCap Value
Pzena MidCap Value
0
100
200
300
400
500
600
Selected ValueWas
Less Volatile
5/07
11/07
5/08
11/08
5/09
11/09
5/10
11/10
5/11
11/11
5/12
11/12
Selected Value (Barrow)
MidCap Value Index
Donald Smith MidCap Value
Pzena MidCap Value
30
40
50
60
70
80
90
100
110
120
Since the Financial Crisis
the IndexWins
3/09
3/10
3/11
3/12
3/13
3/14
3/15
3/16
Selected Value (Barrow)
MidCap Value Index
Donald Smith MidCap Value
Pzena MidCap Value
50
100
150
200
250
300
350
400
>