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The Independent Adviser for Vanguard Investors
•
May 2016
•
5
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100.) The first chart on the left of page
4 shows the long-term performance
of Selected Value since Jim Barrow
took over, plus both Donald Smith’s
and Pzena’s portfolios. While MidCap
Value Index didn’t come into being
until August 2006, I used historical
index returns for earlier months so that
we could get a fuller picture.
Since it’s hard to see much difference
between the portfolios until the post-
financial crisis period, the middle chart
on page 4 focuses on that time period to
give you a sense of the fairly close per-
formance, but greater volatility of some
of the portfolios.
What I think you can see, in particu-
lar, is the relationship between upside
potential and downside risk. And this is
over a fairly bullish period in the stock
markets.
I also narrowed the scope in the
right-most chart on page 4 to run
from the 2007 peak through the recov-
eries for all the portfolios. Donald
Smith & Co. is a deep-value inves-
tor whose style has been successful
over the long term, but with signifi-
cant volatility. During the 2008 finan-
cial crisis, Donald Smith’s mid-cap
value strategy lost 55.0% from its high
through the end of February 2009.
But Pzena’s mid-cap value strategy
was even worse, down a whopping
61.7% on the backs of big bets on
financials. Selected Value lost 50.8%,
which means Barrow and Giambrone’s
portfolio provided at least some ballast
to the portfolio. MidCap Value Index,
by the way, dropped 56.5%, about on
par with Donald Smith’s portfolio.
Barrow and Giambrone were clearly
the winners during the crisis.
But that may not be good enough.
Markets rise more often than they fall. In
a crisis, yes, I’d prefer to have my money
managed by Barrow and Giambrone.
But markets run through cycles, and the
bottom line is that Selected Value has
not given us good value in the mid-cap
value arena over a full cycle. While it
protected us a bit during the financial
crisis, over a full market cycle (or sev-
eral), it’s underperformed, and there’s
absolutely no reason to believe that the
additional managers make it any better,
as you can see in the table below.
Reviewing the Options
Now, you might think that it’s a
pretty simple decision to sell Selected
Value and buy MidCap Value Index.
But as I mentioned, Vanguard has pro-
vided lots of alternatives since we first
bought Selected Value in mid-1999.
Jeff and I cranked up our spreadsheets
and looked at risks and returns for a few
alternatives, including
Capital Value
,
MidCap Value Index, S&P MidCap 400
Value ETF and
Strategic Equity
.
The bottom line is that the active mid-
cap value funds that Vanguard offers as
alternatives just don’t cut it when it
comes to long-term performance, as
shown in the left-most chart at the top
of this page. Yes, Strategic Equity has
had some shining moments, but it also
has some significant downside risks.
And, as you know, Jeff and I have found
that trading into Capital Value when it’s
down and selling it when it’s up can
offer some potential for good gains. But
for a long-term holding, it really comes
down to the two index alternatives.
So we went back and gathered data
on the two indexes these options track,
the CRSP U.S. Mid-Cap Value Index
and the S&P Mid-Cap 400 Value Index,
and made some comparisons.
We came down on the side of the S&P
option, though to be honest, there are rea-
sons you could choose the CRSP option
as well. For instance, we can only access
the S&P index through an ETF, while the
CRSP index is the basis for Vanguard’s
open-end mid-cap value index fund.
Take a look at the middle and right-
hand charts above, which are based on
index returns, not fund returns, going
back to the earliest date for which we
have data on both. You can see that the
S&P index has outperformed the CRSP
index by a compounded 9.1% return
versus 8.6% for the entire period. That’s
a decent half-percent per year. Even if
you were to compare MidCap Value
Index’s Admiral shares’ 0.09% expense
ratio to the S&P ETF’s expense ratio of
0.20%, the 11 basis point difference still
leaves the S&P index outperforming
over time. That’s one thing to consider.
On the risk side of the equation,
the decision is a bit more muddled.
During the financial crisis, the S&P
Vanguard’sMid-Cap
Value Options
Selected Value (since Barrow)
MidCap Value Index
Strategic Equity
Capital Value
S&P MidCap 400 Value ETF
3/00
3/02
3/04
3/06
3/08
3/10
3/12
3/14
3/16
0
100
200
300
400
500
600
>
Lagging, Not Leading
Selected
Value
MidCap
Value
Index
Since Jim Barrow took over 401.3% 442.1%
Since Donald Smith added 126.1% 137.7%
Since Pzena added
1.4% 9.3%
Note: Performance data through Mar. 31, 2016.
S&PNarrowly
Outpaced CRSP
S&P MidCap 400 Value ETF
CRSP US Mid Cap Value Index
3/02
3/04
3/06
3/08
3/10
3/12
3/14
3/16
0
50
100
150
200
250
300
350
400
Different Indexes,
Similar Risks
S&P MidCap 400 Value ETF
CRSP US Mid Cap Value Index
3/02
3/04
3/06
3/08
3/10
3/12
3/14
3/16
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%