Eight is More Than Enough
On Monday, Vanguard announced that it was adding yet another management team to its small-cap Explorer fund, handing firm newcomer Arrowpoint Partners 4% of the fund’s $12.4 billion in assets to start. Arrowpoint becomes the fund’s eighth management team, and the move is emblematic of Vanguard’s continuing infatuation with multi-managed funds, a trend we believe in most cases is detrimental to shareholders, producing bloated, index-like portfolios and diluting quality managers’ performance.
With only a tiny slice of the portfolio, it’s unlikely that Chad Meade and Brian Schaub, the team from Arrowpoint, will have much of an impact on Explorer’s performance, although they likely will be adding to the 650 stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. held by the fund at the end of May. Meade and Schaub have worked together for more than 12 years, first as analysts and then fund managers at Janus, where they ran the Triton fund from 2006 and the Venture fund starting in 2010 before joining Arrowpoint in 2013.
While Vanguard touts multi-management as adding “diversity of thought and approach” to funds, and claims that it reduces riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. while still providing top performance, in the case of Explorer, that does not seem to have been the case. In the chart below, comparing the performance of the actively managed Explorer against Vanguard’s SmallCap Growth Index fund, which has a similar investment universe, you can see how the lower-cost index fund consistently outperformed (indicated by the downward-trending line) for more than a decade between 2001 and 2012, before Explorer finally regained a little ground.
Note: Chart shows relative performance of Vanguard’s Explorer and SmallCap Growth Index funds from 5/31/1998 through 5/31/2014.
Sources: Morningstar (data); Adviser Investments (analysis).
You can also see how, over that period, Vanguard stepped up its hiring (and eventually, firing) of managers, wavering between seven and six teams before adding a seventh team for the third time in 2013 (Stephens) and breaking new multimanager ground with number eight Arrowpoint this month.
One of the qualities that we think sets Vanguard apart in the mutual fund space is its ability to identify top-notch sub-advisers for its funds. We just wish that the firm would hand these managers individual mandates as opposed to adding them to existing funds or bundling them together to co-manage new funds (think Explorer Value with its three teams from inception or Emerging Markets Select StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. and its four teams), which has been the pattern in recent years. While Vanguard may have good reason to be excited about the Arrowpoint team, we doubt Explorer’s investors will notice any difference with its addition, and that’s a shame.
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