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By Christine Benz and Bridget B. Hughes, CFA | 01-08-2013 04:00 PM

2012 Tide Lifts Vanguard's Boats

Although some Vanguard funds underperformed their peers during the market rally, the firm had more portfolios in the top quartile of their categories than in the bottom quartile.

Christine Benz: Hi, I am Christine Benz for The year 2012 lifted many boats, and Vanguard funds were no exception. Joining me to share some performance highlights of the firm is Bridget Hughes. She is associate director of fund analysis for Morningstar.

Bridget, thank you so much for being here.

Bridget Hughes: No problem, thank you, Christine.

Benz: When you look at sort of a headline for Vanguard funds for 2012, what would you say it is, Bridget?

Hughes: Well, I mean as you mentioned, it was a market that lifted many boats, and Vanguard was lucky to be with the tide there. So, there isn't a lot of red ink at Vanguard, though there is a little bit. But what I would say about it is that more of its funds did better than they did worse, so there were more funds in the top quartile, if we're looking at category rankings versus peers, than there were in the bottom quartile.

Benz: Let's drill into some specific asset classes, starting with domestic equities. When you think about some of the firm's biggest winners for last year, what are the funds that jump to mind?

Hughes: So, a couple of them jump to mind. There is Vanguard Windsor, and then there is Vanguard Capital Value. These funds shouldn't really surprise anybody who's been a shareholder that they're at the top of the heap in 2012. I mean they are kind of more aggressive, typically higher-beta, higher-volatility funds, typically with some economic sensitivity in there. Financials were a big part of the story for those funds, and so those kind of spring to mind, both of them with bigger than 20% gains and at the top of the group for Vanguard.

One thing I want to mention about Vanguard Windsor that everybody should always take into account when they're evaluating mutual funds is that there was a manager change in August. This isn't a huge deal I don't think in terms of its performance because Wellington Management, which has been a longtime manager there, continued to run 70% of the portfolio. So really it was a big driver of the returns in 2012.

But the new manager, Pzena Investment Management which also runs John Hancock Classic Value, is a similarly aggressive type of portfolio manager. It will be a little bit more concentrated going forward. So, just because there was a manager change, I wouldn't have investors expect that there is going to be any moderation in the volatility for that fund.

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