Our Three Favorite Vanguard Large-Growth Funds

As most readers of our site know, one of the themes at the 2005 Morningstar Conference was the increasing likelihood of a rebound in large-growth stocks. This segment of the market has struggled mightily since the bubble burst in March 2000. But these stocks have underperformed for so long that valuations are more in line with those of the broader market. A conference panel of three large-growth managers agreed that large-growth stocks look as cheap as they have for some time now. Indeed, many value managers have joined the party by scooping up fallen growth stocks.

Valuation statistics for Vanguard growth funds show that prices for growth stocks look far more reasonable than they did during the go-go years. For example, the price/projected earnings ratio for  Vanguard Growth Equity , the most aggressive large-growth fund in Vanguard's lineup, stood at a whopping 57.26 at the end of 1999, compared with 28.25 for the S&P 500 Index. As of March 31, 2005, the ratio stood at 21.42 for the fund, compared with 16.03 for the S&P 500.

Although I'm not an advocate of market-timing, I think patient, long-term investors can use this as an opportunity to add some large-growth exposure to their portfolios or to rebalance a portfolio that has a taken on an unintended value tilt. Consequently, I thought the time was right to re-examine my favorite large-growth funds of Vanguard's stable. I've ordered them according to my preference.

 Vanguard Morgan Growth 
This fund isn't a high-octane growth fund, but it's still my favorite large-growth offering in Vanguard's lineup. Assets here are farmed out to three separate managers: two quantitative and one fundamental. Wellington Management's Robert Rands, who runs about 40% of the fund, prefers financially healthy firms that he believes can deliver sustainable growth over time. The two other managers, John Cone of Franklin Portfolio Associates and Vanguard's Joel Dickson, employ quantitative enhanced index strategies, with Cone hewing to the Russell Mid-Cap Growth and Dickson the MSCI U.S. Prime Market Growth Index. This fund spans some 340 stocks, and that diversification has helped to quell volatility. Unlike most large-growth funds, this offering holds a slug of mid-caps, which has given it a competitive advantage lately. However, that means that this fund may have less upside potential than a pure large-growth offering should mega-caps revive. But that's not a fatal flaw. In fact, some protection from the wild gyrations of growth stocks is a good thing in my book, and I think this is a fine choice for those looking for a milder growth offering.

 Vanguard Prime-Cap Core (VPCCX)
I know, I know. Morningstar classifies this fund as large blend, but I think it stands to benefit if large-growth stocks return to the fore. The management team from Primecap Management favors companies with secular growth drivers, and the fund tends to have sizeable allocations to traditional growth haunts like technology and health care. Vanguard launched this fund last year to give investors access to the fine management team from Primecap Management. Primecap runs two other successful offerings at Vanguard,  Vanguard Primecap (VPMCX) and  Vanguard Capital Opportunity  (VHCOX), but both are closed to new investors. And there's notable overlap among all three offerings. Consequently, this fund may not see the stellar results that its brethren have enjoyed because the funds probably won't be able to dip down as far in the cap ladder as they have in the past. But it's hard to find more seasoned and successful investors than the team at Primecap, and I think they'll deliver above-average results over the long haul.

 Vanguard Growth Index (VIGRX)
Although I prefer the previous two actively managed funds over this offering, this fund fits the bill for index aficionados looking to give their portfolio a large-growth tilt. A new benchmark adopted in March 2003 should help this fund provide truer exposure to the large-growth universe. Unlike its old benchmark, the S&P/Barra Growth Index, which relies on price/book multiples to separate stocks into growth and value camps, the current bogy, the MSCI U.S. Prime Market Growth Index, uses several variables to make that distinction. It also uses buffer zones to limit the migration of stocks across style and market-cap lines, which should help limit turnover and thus trading costs. Plus, its expense ratio of 0.22% makes it one of the cheapest large-growth funds out there. That said, bargain shoppers might want to look at the VIPER share class, which is priced even lower at 0.15%. However, don't consider the ETF version of this fund if you plan to make periodic investments, as brokerage costs will probably swamp your savings from lower expenses.

This article is from a recent issue of The Vanguard Fund Family Report, our monthly newsletter dedicated to helping Vanguard investors find superior long-term return investment opportunities. To review a risk-free trial issue of The Vanguard Fund Family Newsletter, click here.