(PUB) Investing 2016

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14 • Fund Family Shareholder Association
that Vanguard close the fund and
create new ones to allow the top man-
agers to really add value. This won’t
happen, but it should.
At the start of the year, Vanguard
trimmed the manager ranks, as Century
Capital was fired.Vanguard also reduced
Kalmar’s workload, as the sub-adviser
now only invests 15% of the fund’s
assets, when it previously oversaw
22%. As a result, Arrowpoint Partners,
Stephens Investment Management and
Vanguard’s own Quantitative Equity
Group picked up more of Explorer’s
assets to manage. None of these chang-
es go far enough to materially improve
Explorer’s fortunes.
One final note: Only two of
Vanguard’s 10 board members own
shares in the fund, and fewer than half
of Explorer’s managers have invested
in it—hardly a big vote of confidence.
Explorer Value
Hold. When Explorer Value
launched six years ago with three man-
agement teams and seven portfolio
managers, it was a sign that unless
Vanguard was running the entire port-
folio (as they are with, say, Global
Minimum Volatility), we wouldn’t see
any new single-manager active stock
funds from Vanguard anytime soon.
So after six years, has Explorer Value
proven that multimanaged funds can
compete?
Funny you should ask. Vanguard just
fired one-third of the three-manager
portfolio amalgam, handing Sterling
Capital its walking papers in June. This
may improve what has proven to be a
decent fund over its brief life. (See the
story in the July issue.)
Since March 30, 2010, when the
fund came out of its short subscrip-
tion period, through the end of July
2016, the small-cap value fund out-
paced SmallCap Value Index, 108.6%
to 106.1%. A beat is a beat. So yes, it
outperformed. But my analysis is that
Sterling was a drag on performance,
so things might be looking up here.
The portfolio was trimmed back to 125
holdings from 177 in just one month—
a good thing, in my view. And with just
$300 million or so in assets, fund size
is not a concern.
Dan and I are considering putting a
Buy rating on Explorer Value, but there
is no rush to buy it.
MidCap Growth
Sell. It’s been 10 years since a com-
plete management overhaul here, as
William Blair & Co. and Chartwell
were brought in during 2006 to turn
around the ship. They’ve succeeded in
tempering risk, but if you are looking
for pop on the upside, you aren’t likely
to find it here.
Look at the relative performance
chart above, which compares this fund
to MidCap Growth Index. The active
fund did relatively well during the
2008 credit crisis, losing 49.6% to
MidCap Growth Index’s decline of
54.5%. But it was really just the five-
month stretch from the end of June
through November when the fund out-
performed. In 2011, when MidCap
Growth Index lost 3.8%, the active
fund was able to hold onto gains of
1.2%. However, in the most recent
market decline that ran from July
2015 through February 2016, MidCap
Growth has lagged the index, -16.0%
to -13.5%.
Two for three isn’t bad, and it is fair
to say that risk appears to be under con-
trol, but the gains to the upside haven’t
followed. Since the end of the credit
crisis (February 2009), MidCap Growth
has lagged all other aggressive funds in
Vanguard’s stable.
Smaller losses are easier to recover
from, but if we only focus on down-
side protection, we may miss upside
opportunity. In an aggressive fund, I’m
looking for managers who can take
advantage when times are good as well
as provide some protection when times
are bad.
Strategic Equity
Hold. Vanguard has passed Fidelity
as the largest mutual fund company in
the world, but Strategic Equity had
very little to do with that, even though
Jack Bogle dubbed it a “Fidelity Killer”
when it was launched in August 1995
as Horizon Aggressive Growth.
Strategic Equity is a “quantitative”
fund (meaning the computers do the
stock picking) run by Vanguard’s index
group. The goal is to pick the best and
most “undervalued” small- and mid-
cap stocks, while the 10,000-foot view
of the portfolio doesn’t stray too far
from its benchmark in terms of diversi-
fication across industry sectors or stock
weightings.
Unfortunately, the computers haven’t
proven capable of consistently finding
Multimanaged Explorer
Falling Short of the Index
7/96 7/98 7/00 7/027/04 7/067/08 7/10 7/12 7/147/16
Rising line = Explorer outperforms
▼ Kalmar
hired
AXA Rosenberg
hired
Stephens
hired
Arrowpoint
hired
▼
▼
▼
AXA
fired
GMO hired
GMO
fired Centuryhired
Century
fired
Chartwell
and
Vanguard
added to
fund ▼
▼ ▼
▼
▼
▼
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
Computers vs. Index...
7/98 7/00 7/02 7/04 7/06 7/08 7/10 7/12 7/14 7/16
Rising line = Strategic Equity outperforms
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Strategic Equity vs. Extended Market Index
Strategic Equity vs. MidCap Index
>
The New MidCap Growth
vs. MidCap Growth Index
7/06 7/07 7/08 7/09 7/107/11 7/12 7/13 7/14 7/15 7/16
Rising line = MidCap Growth outperforms index fund
0.90
0.95
1.00
1.05
1.10
1.15
1.20