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Fund Family Shareholder Association
www.adviseronline.comWILL 2016 BE REMEMBERED
as the
year that Vanguard tacitly admitted
that its multimanager strategy doesn’t
work?
Just days after posting yet another
defense of its multimanager strategy on
its website, Vanguard announced it was
trimming managers at
Capital Value
and
International Growth
.
Capital Value, which has been
run by a succession of Wellington
Management portfolio managers as a
solo fund and was converted to a two-
manager fund at the end of 2009, is
going back to its roots with David
Palmer, a senior managing director at
Wellington, as its sole manager.
In a somewhat candid admission,
Vanguard told
Pensions & Investments
that “upon a thoughtful deliberation,
[it] determined that a single manager
structure with David Palmer provides
the investment approach, experience
and expertise that will best serve share-
holders going forward.”
It was a little more than six years
ago when Vanguard said that adding
Palmer to the fund, which at the time
was run solo by Peter Higgins, would
“moderate the fund’s volatility.” I took
a quick look at the fund’s volatility
when Higgins ran it solo, as well as
when he and Palmer were running
it together, and I found that whether
the co-management situation actually
reduced volatility is a matter of inter-
pretation. I couldn’t find compelling
evidence that, over the six-and-a-half-
year period the two worked in tandem,
Capital Value was any less “volatile”
than it was under just Higgins.
Take a look at the chart above,
in which I’ve traced Capital Value’s
relative performance against its Russell
3000 Value index benchmark. The
graph begins with Higgins’ appoint-
ment to the fund, and shows when
Palmer joined him. To my eyes, the
wicked outperformance at the begin-
ning of the period is matched by the
wicked underperformance towards the
end of the period. I don’t think I’ve
ever seen a relative performance chart
that is this extreme.
One reason for the extremes is that
performance has been so highly uncor-
related with the benchmark. During
Higgins’ solo period, Capital Value
gained an annualized 9.8% while the
Russell 3000 Value index lost an annu-
alized 8.2%. Under the dual manager
setup, Capital Value compounded at
a 7.6% annual rate, while the index
compounded at 11.9%. Big disparities
in performance during both periods.
I can’t tell you how Capital Value
will fare under David Palmer’s solo
stewardship. Jeff and I are going to
reassess our three-year trading strategy
for Capital Value given the potential for
lower volatility, if that’s what truly hap-
pens. Stay tuned on that one.
A Real Improvement
International Growth, dating to
1981, is one of Vanguard’s oldest
funds, and its absolute oldest for-
eign stock fund. Vanguard calls it a
restructuring, but in essence, they’ve
fired M&G Investment Management,
reducing the fund’s management ros-
ter from three to two. This leaves
Schroder Investment Management
and Baillie Gifford as the remaining
management teams on the fund—in
my estimation, a smart and wel-
come change. (The same change
is being made at its
International
Annuity
clone.) M&G maintains its
manager duties on
Precious Metals
& Mining
and
Emerging Markets
Select Stock
.
International Growth has been out-
performing
Total International Stock
Index
consistently for much of the last
decade and has been a component of
my
Model Portfolios
for many, many
years as one of Vanguard’s best foreign
stock funds.
I think this is a great change, as I
have a ton of respect for the folks at
Baillie Gifford as well as the Schroder
group. But what’s amusing about this
change is that International Growth
is the one multimanaged fund that
Vanguard regularly uses as evidence
for the benefits of many “cooks in the
kitchen.” Oops.
Vanguard’s press release on both
the Capital Value and International
Growth changes was about the tersest
I’ve seen in many years. As always,
they don’t say much about why they
make these changes, but I can guess
that performance was an issue, as it
almost always is.
It was just June when Vanguard
trimmed the management at
Explorer
Value
from three to two firms by
firing Sterling Capital Management,
something I discussed in the July
2016 issue, after critiquing Vanguard’s
defense of multimanagement in the
June 2016 issue.
I continue to believe that larding up
funds with too many managers simply
spoils performance and is not in inves-
tors’ best interests. It may make sense
from a marketing point of view to have
active funds whose performance never
deviates too far from benchmarks, but
from the shareholders’ points of view,
it’s a lousy way to run a portfolio.
With the manager change, Capital
Value remains a work in progress,
but I am very, very satisfied with the
reduction in managers at International
Growth.
n
MULTIMANAGERS
Maybe Two Heads Aren’t Better Than One
Capital Value vs.
Russell 3000 Value
6/08
6/09
6/10
6/11
6/12
6/13
6/14
6/15
6/16
Rising line = Outperformance
▼
0.75
0.85
0.95
1.05
1.15
1.25
1.35
1.45
Palmer
added
to fund