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All Contents © 2016The Kiplinger Washington Editors
Vanguard Group manages $3 trillion of assets, so it should come as little surprise that the Malvern, Pa., behemoth is a big player in 401(k) plans. In fact, 32 of the firm’s portfolios rank among the nation’s 101 most popular funds in 401(k) plans. No other fund company comes close.
A little over one-third of the big Vanguard retirement-plan products are index funds, a concept with which the firm is synonymous. Also prominent on the list are Vanguard’s target-date funds, a solid choice for investors who want a one-stop, no-fuss option. According to Vanguard, 88% of all the 401(k) plans it administers offer its Target Retirement funds as an investment option, and 66% of plan participants invest in one.
But Vanguard has many actively managed funds, and eight of them also appear on the list. Like all Vanguard funds, these eight carry extraordinarily low expense ratios, particularly for actively managed funds. Low fees aside, we wondered how good these funds really are, so we analyzed them, ranking each one “buy,” “sell” or “hold.” And for those funds that we rated hold or sell, we offer alternative suggestions.
The funds are listed in order of 401(k) assets, starting with the biggest, based on data from Brightscope, a consulting firm that rates and ranks retirement plans. But the figures listed are for each fund’s total assets. Symbols and expense ratios are for each fund’s Investor share class, the most expensive class Vanguard offers. Cheaper share classes may be in your 401(k) plan. Returns are annualized and as of June 30, 2015.
By Nellie S. Huang, Senior Associate Editor
| Updated August 2015
Assets: $89 billion
Expense ratio: 0.26%
1-year return: 3.5%
5-year return: 12.1%
10-year return: 7.9%
If you’re looking for a good balanced fund for your 401(k), you’ll be hard-pressed to find a better one than Wellington. The fund, which invests about 66% of its assets in stocks and 34% in bonds, is the oldest balanced fund in the country and Vanguard’s oldest actively managed fund.
The fund is run by Wellington Management, which has a long relationship with Vanguard. John Keogh has run the fund’s bond side since March 2006; Edward Bousa has handled the stocks since December 2002. Since their pairing, the fund has returned an annualized 7.5%, beating the typical “moderate allocation” fund (Morningstar’s designation for its category) by an average of 2.5 percentage points per year.
Wellington has also stood up well against Vanguard Balanced Index fund (VBINX), another popular 401(k) choice. Wellington’s 7.9% annualized return over the past 10 years topped Balanced Index by an average of 0.9 percentage point per year. Wellington is closed to new customers in a 401(k) plan, even for longtime plan members who don’t already have money in the fund. If you own shares in the fund, it’s a buy.
Assets: $53.6 billion
Expense ratio: 0.44%
1-year return: 8.8%
5-year return: 19.0%
10-year return: 10.5%
We’re green with envy if your 401(k) plan includes this fund, which is run by Primecap Management, and you already have money in it. As is the case with Wellington, Primecap is closed to new investors, including those 401(k) plan participants who don’t already own the fund.
Primecap’s long-term record is superb. Over the past decade, it earned 10.5% annualized, an average of 2.6 percentage points per year better than Standard & Poor’s 500-stock index.
Managers Theo Kolokotrones, Joel Fried, Alfred Mordecai and M. Mohsin Ansari, whom we recently described as the best stock pickers you've never heard of invest in large, growing companies that trade at discounted prices. More than 60% of the fund’s assets are invested in two sectors: technology and health care. At last report, two biotech stocks, Biogen and Amgen, and a traditional drug company, Eli Lilly, were the fund’s top three holdings.
Assets: $48.9 billion
Expense ratio: 0.36%
1-year return: 4.3%
5-year return: 16.3%
10-year return: 7.0%
The knock on this fund begins with its motley crew of managers: 12 all told, from five money-management firms, including Vanguard’s quantitative-analysis, or quant, team. Each firm runs a slice of the assets, and each one has a slightly different approach to picking undervalued large-company stocks, the fund’s broad mission. The theory is that the mix of managers will offer investors a smoother, more rewarding ride than a fund entrusted to one manager or investment firm.
The outcome so far is mixed. Over the past decade, Windsor II has been less volatile than the average large-company value fund, and it returned an average of 0.4 percentage point more per year than the typical large value fund.
But Vanguard 500 Index (VFINX), which tracks the S&P 500 and is another popular 401(k) fund, edged Windsor II by 0.8 percentage point per year over the past decade. And 500 Index was slightly less volatile, too.
Assets: $23.1 billion
Expense ratio: 0.47%
1-year return: -1.6%
5-year return: 10.5%
10-year return: 7.0%
At first glance, a string of manager changes is cause for concern. Three managers have come on board, separately, since 2009; one left in 2013 and another in 2014. And as is the case with several other actively run Vanguard funds, assets are split among several subadvisers—in this case, three investment shops. (We’re not convinced that bringing more firms, more managers and more investing strategies to bear on a fund is a winning formula.)
Over the past few years, something about this group of managers has been working. Starting in 2009, International Growth has posted an annualized return of 12.1%, way ahead of the 9.3% annualized gain of Vanguard Total International Stock Index (VGTSX), the foreign-stock index fund alternative usually found in most 401(k) plans administered by Vanguard. We think it is worth holding if you already own it. Meanwhile, we’re hoping that the game of manager musical chairs has ended, at least for now.
Assets: $12.7 billion
Expense ratio: 0.53%
1-year return: 8.0%
5-year return: 18.6%
10-year return: 8.8%
Explorer, which invests in small and midsize firms, is not a disaster, but neither is it something to write home about. If you have access to Vanguard Small Cap Index (NAESX), you may find it a better choice.
Explorer tilts toward growing firms that trade at reasonable prices. Managers from eight firms, including Vanguard’s quant shop, run the fund. One pair of managers in particular has piqued our interest. Chad Meade and Brian Schaub got a slice of Explorer a year ago. Before that, they had a strong run at two Janus funds with similar strategies: Triton and Venture. But Meade and Schaub were entrusted with just 4% of Explorer’s assets, so they’re not likely to have a huge impact on its performance.
The multi-manager strategy is one way of dealing with Explorer’s gargantuan, $13 billion asset base. Dividing Explorer’s assets among numerous managers decreases the likelihood that the fund would buy or sell huge chunks of a single small-company stock over a brief period, pushing the share price in the wrong direction—down when the fund is selling, up when it’s buying. But having too many cooks in the kitchen almost certainly guarantees bland performance.
Assets: $18.5 billion
Expense ratio: 0.38%
1-year return: 5.4%
5-year return: 17.8%
10-year return: 7.2%
Don’t confuse this fund with Windsor II. Though both invest in bargain-priced, large-company stocks, the funds have different managers. Wellington Management, this fund’s sole adviser from its inception in 1958 until 1999, still controls about 70% of the assets. That portion has been led by Wellington’s James Mordy since 2008. John Paul Goetz, Richard Pzena and Benjamin Silver, of Pzena Investment Management, run the rest (the firm was named a subadviser in 2012).
Windsor has been more volatile than the S&P 500, more volatile than Windsor II and more volatile than the typical large-company fund over the past five years. But it beat each of those bogies over that period, too. One explanation: Windsor devotes nearly one-third of its portfolio to shares of midsize companies (nearly double that of its typical peer). Those securities tend to be more volatile than their bigger brethren but offer more in the way of potential returns.
That makes Windsor a decent option for investors looking for a little more oomph than the typical large-company fund offers. More-conservative investors should opt for Vanguard 500 Index. Investors with tolerance for a bit more risk should consider Vanguard Mid-Cap Index (VIMSX).
Assets: $11.6 billion
Expense ratio: 0.40%
1-year return: 12.6%
5-year return: 17.7%
10-year return: 8.6%
This fund invests mostly in large, fast-growing firms that have competitive advantages, strong balance sheets and smart executives. Morgan’s assets, like those of other actively managed Vanguard funds, have been carved up over the years among different firms. Today, five firms, including Vanguard’s quant group, run the fund.
Morgan’s long-term results are decent. It outpaced the majority of funds in its category (large-company growth funds) in six of the past 10 calendar years through 2014. And its 6% return in the first six months of 2015 put Morgan in the top 20% of its peer group. But over the past 10 years, it has slightly trailed Vanguard Growth Index (VIGRX), which also invests in large, fast-growing U.S. companies.
Assets: $41 billion
Expense ratio: 0.25%
1-year return: 1.6%
5-year return: 9.1%
10-year return: 6.9%
Wellesley Income is essentially the mirror image of Vanguard Wellington. Both funds are run from Wellington Management’s Boston office. But while the Wellington fund generally has two-thirds of its assets in stocks and one-third in bonds, Wellesley keeps two-thirds in bonds and one-third in stocks.
Wellesley is 45 years old, so it has seen a few managers come and go. Wellington Management’s Michael Reckmeyer now handles the stock side; John Keogh, the bond side. Since they teamed up in 2008, the fund has returned a sturdy 7.3% annualized, an average of 2.9 percentage points per year ahead of the typical “conservative allocation” fund (the category to which Morningstar assigns it). The fund offers low volatility, modest fees (0.25% annually) and a 2.5% yield.
But because of all those bonds in the portfolio, we suggest that you tread carefully. With interest rates so low, odds are that they will trend higher over the long term, and that will undermine Wellesley’s performance because bond prices and interest rates move in opposite directions.
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