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Vanguard's Latest Changes

Plus, new foreign funds, T. Rowe's manager shuffle, and more.

Morningstar Analysts, 08/04/2008

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

Vanguard has made a change to the long-suffering, $4.8-billion-in-assets Vanguard U.S. Growth VWUSX. It replaced soon-to-retire subadvisor Alan Levi, who had led AllianceBernstein's disciplined growth team and worked on this fund since late 2002, with AllianceBernstein's large-cap growth team lead by James Reilly and Scott Wallace. That team, which includes 11 managers, also runs AllianceBernstein Large Cap Growth APGAX as well as institutional and separate accounts. Like Levi, the new managers will oversee approximately two thirds of the fund's assets. John Jostrand of William Blair & Company, who has managed a slice of the fund since April 2004, continues to run the other third.

Vanguard U.S. Growth has been perhaps the most disappointing fund in the family's lineup over the last decade. The fund's record under previous managers and under Levi and Jostrand has been poor. It gained 6.5% in the five years ended June 30, 2008, but trailed nearly 70% of its peers. Its 10-year results rank near the bottom of the category.

It's not certain much will change under new management. Reilly and Wallace's large-cap growth team is somewhat more aggressive and trades a little more frequently than Levi, but it relies on the same staff of analysts Levi used (as well as their own research) to find companies they think can grow faster than the rest of the market thinks.

The new managers' record is mixed. Former members of Reilly and Wallace's team ran AllianceBernstein Large Cap Growth in a similar style with poor long-term results. Since Reilly and Wallace took over that fund in 2006 it hasn't done much better, losing an annualized 0.4% from March 2006 to June 2008 while the category gained 2.5%. A separate account managed by Reilly since 1988, however, has a much better long-term record (a 10.4% annualized gain for the 15 years ended June 30, 2008, versus a roughly 8% advance for the Russell 1000 Growth and the large-cap growth category for open-end funds). Also Reilly and Wallace's squad will not have to fight the fee headwinds at Vanguard U.S. Growth that they are up against at AllianceBernstein Large Cap Growth. U.S. Growth has 0.50% expense ratio while AllianceBernstein Large Cap Growth currently charges 1.4%, though fees had been even higher in the past.

New International Funds on the Way
At least three investment management firms have filed plans with the SEC to launch international funds. BlackRock International Diversification will be the most flexible. It will be a fund of funds that invests in all corners of international stock universe through BlackRock EuroFund MDEFX, Pacific MDPCX, Latin America MDLTX, Global Emerging Markets MDDCX, and International Opportunities BREAX. Managers Ewan Watt and Linda Zhang of BlackRock's Multi-Asset Portfolio Strategies group will make opportunistic shifts among these five funds and exchange-traded funds based on market conditions. The firm hasn't announced a launch date or expense ratio.

Putnam is launching its first emerging-market offering. Daniel Ora will serve as lead manager and Ava Ora and Brett Risser will serve as comanagers on Putnam Emerging Markets Equity. This will be the trio's first stint as fund managers. The fund's 1.85% expense ratio is above average for front-load emerging-market offerings. Putnam has yet to disclose its launch date.

Exchange-traded Market Vectors Gulf State Index MES, run by Van Eck Global, has the narrowest mandate of the bunch. The fund seeks to track the recently launched Dow Jones Gulf Cooperation Council Titans 40 Index, which includes stocks from Bahrain, Kuwait, Oman, Qatar, and United Arab Emirates. As of July 29, the fund invests half of its assets in Kuwait, and 71% in banks, financial-services, and real estate companies. The fund has a 0.98% expense ratio.

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