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The Independent Adviser for Vanguard Investors
•
October 2016
•
5
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
Index
are the exceptions among growth
funds, but both benefit from the trend
toward indexing.
An important reminder:
Dividend
Growth
is not a high-yield play.
It is also not a low-volatility fund.
Wellington’s Don Kilbride favors com-
panies that can grow their dividends,
not necessarily those with the highest
yields. Still, the fund has benefited from
investors’ focus on dividends and funds
with a history of downside protection,
plus confusion over its name. Vanguard
having to close Dividend Growth due to
strong cash inflows reflects what inves-
tors are seeking—and it’s not large
growth funds.
So, how should Vanguard investors
like us play the large-cap growth fund
options at our disposal?
Without a doubt, the best growth
manager at Vanguard, large or small,
is PRIMECAP Management. I’ll get
into the team’s individual funds in a
moment. But let’s also call out the tur-
keys. Unfortunately, in instances when
Vanguard has hired other good managers,
they are mostly buried in multimanaged
funds, where their lights are dimmed.And
as good as PRIMECAP is, Vanguard has
picked some real losers among growth
managers—Growth Equity’s abysmal
track record under Turner Investments
was swept under the rug when Vanguard
merged the fund into
U.S. Growth
in
early 2014. And we can all remember
how long Vanguard gave the team at
AllianceBernstein a pass before finally
admitting the error of their ways.
With a handful of ETFs in the mix,
only about half of the large-cap growth
funds in the Vanguard stable are active-
ly managed, and only the PRIMECAP-
run funds have a single outside adviser
running the portfolio. Let’s take a clos-
er look at what Vanguard has to offer in
the space to see what our options are.
Growth Index
, Buy
S&P 500 Growth ETF
, Buy
Russell 1000 Growth ETF
, Hold
MegaCap Growth ETF
, Buy
Whatever happened to indexing sim-
plicity? I don’t blame investors who feel
overwhelmed by the investment choic-
es they face. Vanguard doesn’t make
indexing easy when they offer four
large-cap growth index funds (or ETFs)
based on four different benchmarks.
Unfortunately, performance isn’t
much of a help in differentiating among
the options. From the end of September
2010 (when Vanguard launched the
S&P and Russell index-based ETFs)
through August 2016, gains ranged
from Growth Index’s 117.9% to
S&P
500 Growth ETF
’s 124.9%. That’s a
difference of about half a percent a year.
Performance has been even tighter since
Growth Index and
MegaCap Growth
ETF
changed their underlying bogeys
from MSCI to CRSP benchmarks.
MegaCap Growth ETF at least
sounds distinct from the others, but as
Shakespeare wrote, “What’s in a name?”
As the table on page 6 shows, S&P 500
Growth ETF is also “mega cap,” since
its median company is $88.9 billion in
size, which isn’t far behind MegaCap
Growth’s $95.8 billion median.
The table pretty much confirms that
the portfolios of all four index funds
look awfully similar. Technology and
consumer-related companies make up
about half of the portfolios, while ener-
gy, telecom and utility companies bare-
ly make the cut. Apple and Alphabet
(formerly Google) are the top two hold-
ings across the board. In fact, the same
six companies make up the top six
holdings in each fund.
Where the rubber meets the road, in
the
Growth Index Model Portfolio
, Dan
and I recommend S&P 500 Growth
ETF. Yes, at 0.15%, it isn’t the cheapest
of the options. In isolation this might
be a deal breaker. But there are a few
aspects that lead us to choose S&P
500 Growth ETF. Standard & Poor’s,
which controls the index benchmark,
is more selective when constructing
its indexes, and this tends to result in a
portfolio of higher-quality companies.
And these companies are also cheaper
and somewhat larger than peers. S&P
devotes more of its portfolio to tech
and, importantly, health care stocks
than its siblings. For my money, I
prefer to partner with the team from
PRIMECAP Management, but the S&P
500 Growth ETF will do in a pinch.
Morgan Growth
Hold.
Morgan Growth took a tiny
step in the right direction when one of its
managers, Kalmar Investment Advisers,
was handed a pink slip in January.
Kalmar’s departure left four different
sub-advisers sharing duties at Morgan
Growth—Wellington, Jennison, Frontier
and a team at Vanguard. I applaud the
move to thin the manager ranks, but
Kalmar was only managing 10% of the
portfolio, and you’d be hard pressed to
notice much of a change in the portfolio
since they left. The number of hold-
ings dropped from 342 to 303 in the
first month after Kalmar’s exit, and the
slice of the fund in the top 10 holdings
only moved from 24% up to 25%—not
exactly a seismic shift.
With four firms still stirring the pot,
no one can do too much damage on
their own—but they can’t really drive
performance higher, either. What inves-
tors are left with is a middle-of-the-
road, no-conviction mid- to large-cap
growth stock amalgam.
Investors Flock to Dividend Strategies
2009 2010 2011 2012 2013 2014 2015 2016
Total
Dividend App. Index
$1,041 $2,806 $4,575 $2,234 $3,969
($90) ($1,683) $2,530
$15,382
Dividend Growth
$533 $1,475 $2,507 $3,105 $3,781 $1,290 $1,985 $3,242
$17,917
Equity Income
($153)
$242 $1,145 $2,056 $2,607 $1,499
$23 $2,939
$10,357
High Dividend Yield Idx.
$231
$637 $1,646 $2,054 $2,453 $2,756 $1,122 $3,746
$14,645
Growth Index
$249
$818 $1,298 $2,549 $1,419 $2,851 $3,349 $1,665
$14,198
Morgan Growth
($186) ($548) ($437) ($631) ($876) ($757) ($233) ($825)
($4,493)
PRIMECAP
($661) ($1,800) ($2,448) ($2,444) ($1,105) ($873) ($1,159) ($1,786)
($12,277)
PRIMECAP Core
$781 ($252) ($368) ($619) ($155)
($23)
$344
$39
($252)
Social Index
($19)
$18
($9)
$19
$117
$378
$486
$135
$1,124
STAR Growth
($461) ($196) ($468) ($244)
$526 ($138)
$518
$42
($421)
Adm. Tax-Mgd. Cap. App. ($149)
($98) ($177) ($174)
$108
$85
$151
$54
($199)
U.S. Growth
($264) ($691) ($405) ($155) ($351)
$562
$410 ($279)
($1,174)
Note: Numbers are in millions.
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