Vanguard Multi-Manager Problem Unsolved

Vanguard Doesn’t Solve Multi-Manager Problem With Latest Manager Swap

October 3, 2019

Changing a fund manager can’t always change the dynamic. And we’re confident that the latest turnover at Vanguard’s $44.4 billion Windsor II fund is unlikely to overcome its fatal flaw: Too many cooks in the stock-picking kitchen.

Windsor II, the mega-sized large-cap value fund with 10 managers at the helm, has lagged behind its benchmark and Vanguard’s own Value Index fund consistently since going “multi-manager” many years ago.

Last week, Barrow, Hanley, Mewhinney & Strauss (BHMS), a sub-adviser on Windsor II, announced that Jeff Fahrenbruch would be replaced on the fund by Mark Giambrone. Will Giambrone be the one to get Windsor II off the schneid?

Barrow Hanley, which was running 39% of the fund as of its last semiannual report, shares management responsibility with Lazard Asset Management, Hotchkis & Wiley Capital Management, Sanders Capital and Vanguard’s in-house quantitative management group. That adds up to 10 managers from five sub-advisers running pieces of the portfolio.

We’d joke about investors getting a good price on managers with shares in the fund, but the fund’s track record of late has been no laughing matter for shareholders.

Value investing (a style that emphasizes paying less for something than the buyer thinks it is worth) has struggled to keep pace with growth investing (a strategy that banks on profit growth over asset values in determining a company’s worth) since the Great Recession. But that alone doesn’t explain Windsor II’s decade-long woes.

The chart below tells the tale. Windsor II has put up a woeful performance against Vanguard’s 500 Index fund (which mimics the S&P 500 index). As we said, value stocks have lagged growth stocks, so that’s no huge surprise. But it’s also trailed two large-cap value benchmarks in the Russell 1000 Value Index and Vanguard’s Value Index fund. Why invest in Windsor II to get worse than index-like returns while paying active management fees? No, thanks.

vanguard
Note: Chart shows relative change in value of an investment in Vanguard Windsor II compared to an investment in the comparison fund or index. A rising line indicates outperformance for Windsor II; a falling line shows outperformance by the comparison fund or index. Chart covers period from 2/28/09 through 9/30/19. Source: Morningstar Direct.

Giambrone—who also manages a portion of Vanguard Selected Value—has got all the trappings of a star manager, but as BHMS’ portion of the Windsor II portfolio continues to decline, no matter how brightly he shines, his impact will be watered down.

We’d joke about investors getting a good price on managers with shares in the fund, but the fund’s track record of late has been no laughing matter for shareholders.

Vanguard claims that stacking multiple sub-advisers on a fund tempers manager risk, insulating against the possibility of a single manager severely underperforming and dragging an entire portfolio down with them. The fund giant would also assert that it protects against a fund being radically altered by the retirement of a single manager—that’s something Windsor II shareholders can rest easy about at night, to be fair. (These factors are part of the reason why our research team spends so much time talking to fund managers and reviewing their portfolios. It means we always have high-confidence backups at the ready in case a preferred fund manager decides to hang it up, loses a step or their fund closes to our clients.)

At Adviser Investments, we buy the manager, not the fund. We stand by our time-tested approach to investing in active managers with a long-term track record of strong risk-adjusted returns over full market cycles. We let them do what they do best. In our eyes, it makes no sense to dilute the impact of true, verifiable investment talent.


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