Vanguard Mum on Mid-Cap Manager Shake-Up

Vanguard Mum on Mid-Cap Manager Shake-Up

November 24, 2021

In This Issue:

Vanguard Mum on Mid-Cap Manager Shake-Up

Vanguard’s Mid-Cap Growth fund is paying out a whopper of a distribution this year—25% of the fund’s net asset value will be returned to shareholders. Usually, you only see a distribution that large when Vanguard’s fund advisers are on the move.

We haven’t seen any announcement from Vanguard, but they quietly shifted responsibilities among the fund’s sub-advisers in a fairly meaningful way on Oct. 18, according to a report from Morningstar. RS Investments, which managed about 45% of the portfolio in the past, now oversees just 20%; and Frontier Capital’s allocation was cut from 45% to 40%. Tim Manning of Wellington came out on top following the reshuffle, now managing 40% of the portfolio, up from 10%.

Is all this cloak and dagger around the manager shift significant?

It’s Vanguard’s prerogative to keep changes like this under wraps. No managers were hired or fired, so nothing had to be filed with the SEC. And it’s possible we missed an announcement—but we watch this stuff pretty closely. Even Vanguard itself hasn’t caught up to the change: The old allocation still shows on its institutional website.

The bottom line is that Vanguard needs to be more transparent. This is a material enough change to the fund that it’s worth alerting shareholders.

Plus, we don’t think this shuffling of management roles fully explains Mid-Cap Growth’s massive distribution. The fund began 2021 with realized gains of about 4% on the books. Those rose to about 13% midway through the year and hit 20% by the end of September—prior to the management shuffle.

Either the fund was transitioning to the new arrangement well ahead of the reveal in Morningstar or years of net outflows—shareholders selling out of the fund—finally caught up to the managers and the fund. In the latter case, the fund could be set up for another big distribution in the future as about a third of the portfolio transitions from RS Investments and Frontier Capital over to Wellington.

Given Vanguard’s lack of disclosure, we’re all left to wonder.

Equally unclear is how each Mid-Cap Growth sub-adviser has performed. It seems this readjustment is an affirmation of Wellington’s performance, but Vanguard doesn’t release data for sub-adviser performance.

As we’ve discussed before, Vanguard’s multimanager approach reduces the portfolio risk of a single manager leaving for another firm or making a bad bet. But it also limits a talented manager’s ability to add value for shareholders. Plus, shareholders have less insight into what each manager is delivering. We prefer a sole skilled manager at the helm whose performance is plain to see—without any opaque reshuffling.

Stress-Test Your Financial Plan

This week’s reader question is about preparing for rising prices: How can I make sure my financial plan and portfolio are inflation-ready? 

JonPaul McBride Financial Planner is pictured.Financial Planner JonPaul McBride had this to say:

Can you stress-test your financial plan and make your portfolio inflation-proof? It’s an excellent question and one that is front of mind for us.

Federal Reserve Chair Jerome Powell believes inflation will let up later in 2022 once pandemic-related labor shortages and supply chain problems get sorted and the economy settles into a post-COVID normal. We’ll see how that hypothesis plays out. Until then, rising prices at the gas station and grocery store, not to mention monthly housing and heating bills, are leading to some serious sticker shock. What can you do to mitigate the sting?

First, you can revisit your financial plan or work with us to create one if you haven’t already done so. Drilling down, we can stress-test your budget by identifying the line items that leave you the most exposed in 2022: Heating costs, upcoming medical expenses, rent or mortgage obligations and weekly groceries. We can help you project how inflation might affect your personal balance sheet and ability to meet near-term financial goals.

Second, we highly recommend that you not make dramatic changes to the asset allocation in your portfolio without talking to your adviser. Yes, some research has shown that so-called value stocks, which tend to trade at a lower price relative to their fundamentals, have done well during inflationary periods. But everyone’s risk profile is different. The rule of thumb for most long-term investors? A well-diversified portfolio is the best hedge in any market environment.

Finally, if you are thinking about borrowing to buy a house or car, go with a fixed-rate loan. Wages (and often the value of your portfolio) tend to rise with inflation. So, while your fixed payments will remain the same, you can expect to earn more money over time while spending a smaller percentage of your paycheck as each year goes by.

While inflation is largely out of your control, your financial game plan is not. Let us know if we can help you think through minimizing the negative impacts of rising prices on your bottom line.

Chart of the Week: The State of Foreign Stocks

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso

“Why own foreign stocks?” It’s a question I’m hearing more and more these days. I get it. Over the past decade-plus, U.S. equities have dominated foreign stocks. But that hasn’t always been the case. Foreign stocks will come back in favor… just don’t ask me when! (For more on the diversification benefits of foreign stocks, check out our recent podcast.)

Foreign Stock Performance
Note: Price returns as represented by S&P 500 and MSCI EAFE indexes. Sources: Adviser Investments, Morningstar.

Podcast: The S&P 500 Index—Is It All Investors Need?

One index fund to rule them all: Can investing really be so simple? So far, 2021 has been a remarkably strong year for the U.S. stock market—so much so that some experts suggest the best strategy for average investors is buying an S&P 500 index fund and walking away. Chairman Dan Wiener and Director of Research Jeff DeMaso disagree. In this episode, they discuss the myths and realities of passive investing, including:

  • The math of losses and the role of bonds in a portfolio
  • Whether investors really need foreign stocks
  • The case for active management

Successful investing requires commitment, but it doesn’t have to be complicated. Dan and Jeff explain why we eschew investment trends and how and why we build our portfolios for the long term. Click here to listen now, or read our special report Indexing vs. Active Management to learn more about our approach.

Adviser Investments’ Today’s Market Takeaways

There’s no shortage of hyperbolic headlines and provocative punditry in the financial media. But you won’t find such hysterics here. In Today’s Market Takeaways, members of our investment team provide timely videos that clearly and concisely explain what we’re seeing in the markets.

Vice President Steve Johnson offered his thoughts on the market’s mixed messaging, while Research Analyst Liz Laprade talked about the difficult decisions Federal Reserve Chair Jerome Powell will need to make in his second term.

We hope you find these episodes engaging and accessible. If there are any topics you’d like us to address, please send an email to info@adviserinvestments.com!

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


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