Fund Times: Vanguard's Sauter Coming Off Index Funds

Gus Sauter is no longer listed as the day-to-day manager for many of Vanguard's index funds, including  Vanguard 500 Index (VFINX),  Vanguard Total Stock Market Index (VTSMX), and  Vanguard Balanced Index (VBINX). He will remain as the firm's chief investment officer, a role that was created for him in June 2003.

According to Sauter, the change reflects the evolution of his role from day-to-day manager of Vanguard's index and quantitative funds, to the firm's CIO. While Sauter remains involved in overseeing Vanguard's quantitative equity group--which runs the index funds and an array of quantitative strategies--he has taken on additional duties, including instituting additional risk management controls. Moreover, Vanguard was probably forced to make the change given that the Securities and Exchange Commission's new rules require funds to disclose the names of managers who are "jointly and primarily" responsible for day-to-day management, a standard that Sauter no longer meets given his oversight responsibilities.

Although we admire Sauter, we don’t think investors should be too concerned with this change. The controls, procedures, and tools that Sauter helped establish should give the new lead managers at Vanguard what they need to continue the funds' index-matching consistency. And Sauter remains in charge of the group as a whole, so his presence will continue to be felt.

Longtime Fidelity Skipper Jumps Ship
On May 2, 2005, Karen Firestone, manager of  Fidelity Large Cap Stock (FLCSX) and its clone,  Fidelity Destiny I (FDTOX), will leave Fidelity. This month would have marked Firestone's seventh year managing the Large Cap fund. Before taking the helm on these funds, she was an analyst for more than 10 years at Fidelity. While the funds were rarely top-quartile performers--indeed, they haven't beaten the S&P 500 in years--her lengthy experience and the structural setup of the fund gave us comfort.

Matthew Fruhan, manager of  Fidelity Select Financial Services (FIDSX) since April 2004, replaces Firestone on the Large Cap fund. We think he's one of the sharper young guns at Fidelity.

Fidelity will now also split the responsibilities of running the other funds between two different managers. Timothy Cohen, current manager of  Fidelity Export & Multinational , will run the Destiny I fund. We like Cohen too, and think he's one of Fidelity's hidden talents.

Goliath Gets Even Bigger
In data released this week by Financial Research Corporation, American Funds continues to dominate inflows to mutual funds. In March 2005, $7.2 billion worth of new money went to American's funds; $5.2 billion went to Vanguard, and Fidelity placed a distant 10th with a little more than $1 billion. The story is similar in year-to-date flows--American Funds gained $23.6 in assets in the first three months of 2005, compared with Vanguard's $17.1 billion.

Six of the 10 best-selling funds this year come from American, where  American Funds Growth Fund of America (AGTHX) keeps the top-selling title. That fund averages $1.5 billion in new money monthly, on top of its existing $98.2 billion in assets that are spread among 250 large-cap stocks. To put that in perspective, the mangers of this behemoth must put $50 million of new money to work every day, or find $6.2 million worth of ideas every hour in a normal eight-hour day. As assets continue to swell, these funds will have a challenge on their hands to maintain performance at the high level investors have become familiar with. 

Fidelity Closes International Small Cap at Last
We wondered if it would ever happen, but  Fidelity International Small Cap (FISMX) is finally closing to new investors on May 5, 2005. The fund's assets have spiked to more than $2 billion, making it one of the category's larger offerings. Although it's closing later than we would have liked, it's still a positive for shareholders.

That said, we've already seen signs that the larger asset base diluted the way that the fund is managed. For example, when it was first released, the fund was firmly in small-cap territory. It has since started buying larger stocks, and now resides in mid-cap land. Further, while the fund's first portfolio had around 150 holdings, it now holds about 500 names. That hardly inspires confidence in the fund's board.

Etc.
Fund Analyst Pick  Julius Baer International Equity (BJBIX) will be closing to new investors on May 4, 2004. The fund has grown to more than $12 billion in assets, so shutting off the valve now is a good idea, although it, too, came a bit late.

In a supplement to a prospectus dated April 21, 2005, Leigh Goehring is leaving Jennison Associates and will no longer manage  Jennison Natural Resources (PGNAX). David Kiefer, who has done a decent job running  Jennison Utility Fund (PRUAX) and also runs  Jennison Value  (PBEAX),  Jennison Blend (PBQAX) and  Jennison 20/20 Focus , replaces Goehring as lead manager. Michael Del Balso, who's worked in various capacities at Jennison since joining in 1972, will comanage.

We were surprised by this news. Losing Goehring is a huge blow to the firm, and is the second high-profile manager departure in the past three months, according to Morningstar fund analyst Laura Lutton. We're also concerned that Kiefer may be spreading himself too thin now that he's running five separate mutual funds.

In an SEC filing dated April 22, 2005, Beverly Hills-based Pacific Financial Research announced a new fund, Clipper Funds All Equity. The fund will be a concentrated portfolio with between 15 and 35 holdings. Running the fund will be six managers, James H. Gipson, Michael C. Sandler, Bruce G. Veaco, Nugroho Soeharto, Peter J. Quinn, and Kelly M. Sueoka, most of whom already manage  Clipper Fund (CFIMX). Finally, there's a temporary expense cap in place, ensuring that fees won't exceed 1.25%, although that's still higher than the no-load large-value fund average of 1.07%.