investing

Four Great Actively Managed Vanguard Funds

A longtime Vanguard watcher says you don’t have to rely on the firm’s index funds to produce superior results.

Dan Wiener has edited a newsletter about Vanguard’s mutual funds for 23 years. But here’s a surprise: He doesn’t think much of index funds. Instead, he invests almost exclusively in Vanguard’s actively managed funds.

TOOL: Kiplinger's Mutual Fund Finder

Here’s how he puts it. “For all the arguments about why indexing is better, low cost is the only one that means anything. And Vanguard offers very low prices on actively managed funds. I use active managers because I think I can pick funds that will do better than the indexes.”

Wiener has delivered for his subscribers. Over the past ten years through February 28, his newsletter, The Independent Adviser for Vanguard Investors, has returned an annualized 8.3%, compared with 7.7% for Standard & Poor’s 500-stock index, according to the authoritative Hulbert Financial Digest. Wiener has also achieved market-beating returns over other time periods. What’s more, Wiener’s portfolios have exhibited 15% less volatility, on average, than the overall stock market. That’s important because lower volatility almost always translates into smaller losses in bear markets.

One of the things I like about Wiener is that he’s not shy about telling you which funds he likes—and which he doesn’t. Following are some of his favorites.

Vanguard Capital Opportunity (VHCOX). Primecap Management, the subadviser on this fund (Vanguard hires outside firms to run almost all of its actively managed stock funds), is Wiener’s favorite growth-stock shop. Primecap has produced superb long-term returns for Vanguard since the 1984 launch of Vanguard Primecap. Over the past ten years, Capital Opportunity, the smallest of Vanguard’s three Primecap-managed funds, returned an annualized 10.3%. That beat the S&P 500 by an average of 2.8 percentage points per year. Annual expenses are 0.48%. (All fund returns in this article are through March 31.)

All three Vanguard Primecap funds are closed to new investors, but you can invest in similar funds offered directly by Primecap. Wiener says Primecap Odyssey Aggressive Growth (POAGX) is actually a better choice than Capital Opportunity because it has fewer assets ($5.8 billion) and, therefore, can more easily invest in small- and midsize companies. Annual expenses are a reasonable 0.64%.

Vanguard Dividend Growth (VDIGX). Don’t look for high-yielding stocks here. After subtracting the 0.29% annual expense ratio, this fund yields just 2.0%. Instead, Wellington Management’s Donald Kilbride hunts for high-quality blue chips with rock-solid balance sheets, and steadily growing revenues and earnings. The approach has achieved generous long-term returns with low volatility. Over the past ten years, the fund returned an annualized 9.0%—an average of 1.6 percentage points per year better than the S&P 500. Yet the fund has been about 20% less volatile than the benchmark. Kilbride currently has 35% of the fund’s assets in consumer staples and health care. Dividend Growth earns its keep in bad markets. During the 2007-09 bear market, it lost only 42.3%, compared to the 55.3% plunge in the S&P index.

Vanguard Health Care (VGHCX). Wiener has invested heavily in health care “forever.” He likes the demographic trends and the promise of new medical treatments. Run by Wellington Management, the fund has a value tilt, a strong record and surprisingly low volatility. Longtime manager Ed Owens retired last year, but Wiener says Jean Hynes, who became co-manager in 2008 and took over as sole manager when Owens retired, is every bit as good. Over the past ten years, the fund returned an annualized 11.6%. Expenses are 0.35% annually.

Vanguard Selected Value (VASVX). James Barrow has been investing successfully for Vanguard Windsor II since 1984, but Windsor II now has managers from five different firms. Barrow and Mark Giambrone, of Barrow, Hanley, Mewhinney & Strauss, manage most of Selected Value; Donald Smith & Company manages the rest. The fund, which invests mostly in undervalued midsize companies, has delivered superior returns. Over the past ten years, it returned an annualized 10.3%, putting it in the top 10% of its category. Annual expenses are 0.43%.

You can’t call Wiener a shill for Vanguard. He’s irritated by Vanguard’s propensity to cope with asset growth by adding more management firms to funds. That means three or four firms run portions of some funds. “Windsor II has been turned into a second-rate fund by Vanguard adding more and more managers,” Wiener fumes.

Nor does Vanguard offer good options for investing in small companies, he says. “Vanguard Explorer is overrun with managers.” The fund, which lists managers from seven different firms, slightly trails the Russell 2000 Growth index over the past ten years.

How does Wiener pick funds? “You look at past performance,” he says. He’s not talking about just raw returns or short-term results. “We’re looking for consistent outperformance.”

He and his staff devote a lot of time to analyzing how funds perform during a bear market: “How big a loss did a shareholder take, and how long did it take to recover?” He also talks to managers to get “a sense of their passion and commitment.”

Wiener is good. But, as he says, his results benefit from the advantage of Vanguard’s low fees. What’s more, Vanguard does a superb job of hiring and monitoring managers. Still, it’s hard to fault Wiener’s fund picks or his record.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

Most Popular

Which States' Taxes Are Going Down
Tax Breaks

Which States' Taxes Are Going Down

State lawmakers are cutting income, sales and property taxes to return budget surpluses to residents.
May 25, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is at an all-time high. What’s driving the surge and will gas prices go down anytime soon?
May 23, 2022

Recommended

Is the Stock Market Closed on Memorial Day 2022?
Markets

Is the Stock Market Closed on Memorial Day 2022?

The stock market gets a full day off for Memorial Day. The bond market gets Monday off too, not to mention an early close ahead of the holiday weekend…
May 27, 2022
What Is Preferred Stock, And Should I Buy It?
investing

What Is Preferred Stock, And Should I Buy It?

Thinking of adding preferred stock to your portfolio? Read on for a breakdown of the pros and cons to buying preferred shares.
May 26, 2022
What You Need to Know About Mutual Fund Returns
mutual funds

What You Need to Know About Mutual Fund Returns

A guide to the many ways these popular investments measure their performance.
May 26, 2022
9 Great Alternative-Strategy Funds for Volatility
mutual funds

9 Great Alternative-Strategy Funds for Volatility

These alternative-strategy funds can offer some shelter from stock and bond market turmoil.
May 26, 2022