Why Vanguard’s Actively Managed Funds Are a Better Bet
In 1991, Dan Wiener, a magazine reporter covering mutual funds, decided to get into the newsletter business. As the name he chose for his letter made clear, the mission of the Independent Adviser for Vanguard Investors would be to provide unbiased advice to clients of the Malvern, Pa., fund giant. Explains Wiener: “As a mutual fund writer, I had all this information at my fingertips that average investors didn’t. And investors got no advice from Vanguard, so I thought this might be valuable.”
Within a year, Wiener had quit his day job. Today, says Wiener, the letter has 36,000 subscribers who pay up to $229 for a one-year subscription (new customers can get a one-year subscription for $99.95 at http://adviseronline.investorplace.com).
Wiener’s candor is one of the letter’s big draws: He doesn’t shy away from blasting Vanguard when he believes criticism is warranted. Wiener, who is also chief executive of Adviser Investments, a Newton, Mass., advisory firm with $3 billion under management, spoke with us about his newsletter, where Vanguard falls short and the one fund firm that every investor should have money with. (Hint: It’s not Vanguard.)
KIPLINGER’S: Why a newsletter only about Vanguard funds?
WIENER: In the early years, there was no such thing as a mutual fund supermarket. So you were either a Fidelity investor or a T. Rowe Price investor or a Vanguard investor or an investor with another firm. I had begun to invest money for my kids at Vanguard because I felt it offered funds run by some managers I wanted to put my money with. Vanguard had the Primecap Management guys running Vanguard Primecap (symbol VPMCX), which is now closed to new investors. It had a team from Wellington Management running Vanguard Health Care (VGHCX). Jim Barrow was running Vanguard Windsor II (VWNFX)—without a lot of the managers who have been added since, mucking up his performance. So you had really good managers running some excellent funds.
Vanguard, of course, is famous for its index funds. Do you object to indexing? I think you can do better. As indexing has become more popular, it leaves more stock-picking opportunities to the good fund managers. I would be thrilled if everybody indexed except for the people who read my newsletter and my clients at Adviser Investments.
How do you choose the funds you recommend? I’m not a buyer of mutual funds. I’m a buyer of managers. A good stock picker can outperform his or her index. It’s easier to do that at Vanguard because Vanguard funds have low expense ratios, whether they are index funds or actively managed funds.
Does the size of a fund matter? Size absolutely matters. Unfortunately, when a fund gets too big, Vanguard adds a second, a third, a fourth, a fifth manager rather than shutting it. Look at Vanguard Explorer (VEXPX). It used to be run by Wellington and once had a tremendous track record. Now it’s overrun with eight subadvisers. It’s like putting eight chefs in the kitchen and telling them all to make one kind of soup. It’s just awful.
What’s the problem? You end up with an index-like fund with index-like risk. Until recently, funds such as Explorer, as well as Morgan Growth (VMRGX) and Windsor II, have been staples of 401(k) plans. And in 401(k) plans, you don’t want a fund to underperform by too much. So what Vanguard has done is to dumb down these funds to make them palatable for retirement plans. Vanguard should have closed them to new investors a long time ago. But there’s a benefit to keeping the funds open: Starting a new fund is more expensive than running a multibillion-dollar fund.
Do top-down, big-picture factors play a role in determining your fund picks or your model portfolios? We—I and my director of research, Jeff DeMaso—are not trying to time the market. If we think the economy is going to do well, we might give a little more money to a manager with a portfolio that’s more cyclically oriented and take money away from a manager who is more growth-oriented. But the bottom line is, we’ve got great managers working for us, so why second-guess them? We’ve done well. Vanguard founder Jack Bogle said outperforming the market by even one percentage point per year is a huge feat, and we’ve beaten it by better than two percentage points per year using Vanguard funds. [Over the past 20 years, Wiener’s growth portfolio returned 12.1% annualized, compared with 9.7% for Vanguard 500 Index (VFINX).]
What are your favorite Vanguard funds? My three top picks are Dividend Growth (VDIGX), Health Care and Selected Value (VASVX). [Dividend Growth and Selected Value are members of the Kiplinger 25.] These three funds provide the core of a terrific portfolio. Dividend Growth is run by Wellington’s Don Kilbride. The stocks he owns tend to be what I call battleships: firms with strong balance sheets. I can’t say enough good things about having an overweight exposure to health care in a portfolio. Demographics pretty much demand it. [For more on this topic, see The Best Health Mutual Funds to Buy Now.] As for Selected Value, the majority of it is still run by Jim Barrow and Mark Giambrone, of Barrow, Hanley, Mewhinney & Strauss. These guys are excellent. The fund has just added a third subadviser, but as long as Barrow and Giambrone run the bulk of the portfolio, I’ll be happy.
And then you have to leave Vanguard to get a piece of the Primecap Management guys, who specialize in growth stocks. I like any fund run by the Primecap team. The firm manages three outstanding Vanguard funds, but they’re all closed to new investors. But two funds sold by Primecap, Odyssey Growth (POGRX) and Odyssey Stock (POSKX), are still open.
Does Vanguard shortchange its active managers? Yes. How many times do you hear Vanguard say, “We have these great active managers”? Ed Owens, the longtime manager of Health Care, who retired in 2012, had probably the single best track record in the entire industry. And Vanguard barely mentioned his name. Meanwhile, look up the “select” funds on Vanguard’s Web site. This really gets me. It says, “Build your portfolio with a few of our well-established, broadly diversified low-cost funds, selected by our Portfolio Review Department.” Vanguard selects three index funds and three actively managed funds: Explorer, Morgan Growth and Windsor II. C’mon, guys. That’s just embarrassing.