Vanguard DividendA cash payment to investors who own stock in the company. Growth Closes
In a surprise move, Vanguard announced that Vanguard Dividend Growth was closed to all new investors effective immediately on Thursday, July 28. Existing shareholders can continue to buy shares, but everyone else is locked out.
Vanguard cited the fund’s strong run of performance this year and the steady inflows of new cash it attracted as its rationale. Dividend Growth saw $3 billion in new investment over the last six months and recently passed $30 billion in assets.
In its press release, Vanguard gave itself the leeway to take further steps to keep the fund’s assets under control (for example, limiting shareholder investments to under $25,000 a year or the nuclear option of a “hard close” where no new investments are accepted at all), or to reopen the fund, but there were no timeframes or qualifiers placed on either of these scenarios.
While anyone barred from opening a new position in the fund may be disappointed, we think this is a very shareholder-friendly move for those who already own the fund, and an instance where Vanguard has exhibited good judgment in how to handle rising inflows. In the past, we’ve been critical of Vanguard’s choices to add new managers to funds as they grow instead of closing them. Dividend Growth’s investors can rest a little easier knowing that even though the fund is closed, its management and strategy will continue to be the same.
More Vanguard Sub-Advisers Get the Ax
Speaking of surprising moves, two weeks ago, Vanguard terminated two more sub-advisers from funds, just days after publishing a post to its website defending its multimanager approach on a number of prominent funds. As the terminations pile up this year, Vanguard’s argument for the benefits of multiple sub-advisers on funds is starting to ring a bit hollow.
On July 15, Vanguard terminated London-based M&G Investment Management from its $21 billion International Growth fund, where M&G had managed 11.5% of assets. Remaining managers Schroder Investment Management and Baillie Gifford will assume control of M&G’s portion of the fund. (The same changes were made on the fund’s variable annuityA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death).
Vanguard’s uncharacteristically terse press release gave no explanation for the termination, but the sensible guess is that performance was a concern, as is usually the case. Given that International Growth has outperformed its benchmark for much of the last decade and has been a standout foreign stockA financial instrument giving the holder a proportion of the ownership and earnings of a company.
fund for Vanguard, it’s natural to wonder how much M&G was a drag on Schroders and Baillie Gifford’s results.
Also on July 15, Vanguard announced that it was giving Peter Higgins of Wellington Management the heave-ho from his co-managerial role on its $934 million Capital Value fund. David Palmer, also of Wellington, assumed full control of Capital Value.
The July firings continued what’s become a theme in 2016: The culling of sub-advisers from multimanaged funds. As we discussed last month
, Vanguard fired Sterling Capital Management from Explorer Value’s three-adviser team, and reallocated Sterling’s assets to the two remaining co-managers.
, the fund giant announced that it had fired a management team each on its Explorer and Morgan Growth funds, though both remain multimanager muddles in our view.
Ultimately, it appears that the recent swath of firings are likely more performance-related than any renunciation of Vanguard’s commitment to the multiple manager format in toto. The endorsement of a multi-manager strategy for certain funds is nothing new from the firm; since 1987, it has maintained the same official stance that the format “can reduce portfolio volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in.
, provide potential for long-term performance and mitigate manager 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.
From a marketing standpoint, Vanguard might be successful in touting the strength of “active” funds that deviate little from their benchmarks, but we’re not buying it. In our view, the more managers on a fund, the more likely that good ideas get watered down and it either increasingly resembles the index it’s mandated to beat or sees performance fall off relative to its benchmark and peers.
While actions may speak louder than words, Vanguard’s recent firings in combination with a June 29 article posted to its Advisor website are sending a mixed message. As the firm was likely already contemplating terminating M&G from International Growth, the aforementioned piece held the fund up as an example of the benefits of spreading portfolio responsibilities across multiple people and firms.
We don’t disagree with the argument for diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not.
, but we’d prefer to pick the managers and the funds they run on an individual basis for our portfolios instead of relying on a multi-managed fund with a layer of opacity over the impact of each team’s strategy on the entire fund. That way, we don’t have to wait for a firm like Vanguard to eventually make the right choice and fire an underperforming sub-adviser, all the while being forced to speculate as to the benefits they may or may not be providing the portfolio. With single-manager funds, it’s clear whether they are serving their role or not and who is responsible, and we have control over who is managing our money.
At Adviser Investments, our persistent belief is that too many cooks in the kitchen are not in the best interest of investors. We are hopeful that Vanguard is coming to this viewpoint as well, and that the firm’s moves so far in 2016 are an indication of that.
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