Should You Worry About These 8 Vanguard Manager Changes?

By the end of February, after Vanguard had announced manager changes to eight mutual funds and the selection of a new CEO over the course of two weeks, I had to do a double take. Was I covering Vanguard or Fidelity Investments? Normally, Vanguard's Boston-based rival is the one known for issuing fusillades of personnel changes and executive reorganizations. Maybe I got on the wrong e-mail list?

Nope. The telltale ship-of-the-line logos on the press releases, preponderance of nautical terms, and Anglophilic fund names confirmed it. It was indeed Vanguard. But what was going on? Why, to stick with the maritime theme, was everyone abandoning ship?

Well, you can stow away your life jacket. Granted, a spate of manager and executive changes like this can raise red flags, and that's true of some of the recent Vanguard changes. However, shareholders shouldn't notice much of a change at most of the funds getting new managers.

That goes for the captain's quarters, too. I've already written about Vanguard CEO Jack Brennan's decision to pass Vanguard's helm on to William McNabb. I don't expect a drastic (or even modest) course correction. Click here for details. As for the rest of the recent changes, here's my take on them in order severity of impact.

Red Sky at Morning�
Vanguard decided to take nearly $2 billion in assets at two funds from subadvisor GMO and give it to Vanguard's own quantitative equity group. Vanguard QEG, now runs about 33% of  Vanguard U.S. Value  and a smaller slice of  Vanguard Explorer (VEXPX). The move will have the biggest impact on U.S. Value, which has struggled since 2005. This used to be one of our large-value analyst picks because it offered cheap access to GMO, a quantitative manager with a long and accomplished institutional record. But in the last year, it has become a different fund. My colleagues and I dropped it from the picks list when Vanguard diluted GMO's influence by adding another quantitative manager, AXA Rosenberg, last June. I remained upbeat about the fund, though, thinking that a little GMO was better than none. That rationale for owning the fund is now gone.

That is not to say AXA Rosenberg and QEG don't deserve a chance. Both teams have decent records at other funds. QEG will employ the same models it has applied to the portion of  Vanguard Windsor II (VWNFX) since 1991 and will do so for a lower fee than GMO because QEG, like the rest of Vanguard, provides its services at cost. AXA Rosenberg runs Vanguard Market Neutral (VMNFX) and a number of funds under the Laudus Rosenberg brand with versions of the models it uses at U.S. Value. At worst, this fund will be a very cheap and diversified quantitatively managed basket of stocks with generally lower-than-average valuations than the broad market. It probably won't kill you, but it has some proving to do before it gets a strong recommendation again.

The Mediocre Six?
GMO's departure is less of an issue at Vanguard Explorer, where it was one of seven subadvisors, including Vanguard QEG, which will pick up most of the departed subadvisor's share of the fund. The biggest issue for this fund, which is now left with six subadvisors, remains its size. Vanguard has limited new investments to those with more than $1 million at Vanguard (and to those purchasing fund of funds  Vanguard Diversified Equity (VDEQX)), but it's one of the largest small- or mid-cap growth funds around. Limited shareholder access, low expenses, and a diverse array of subadvisors that aren't always moving in the same direction alleviates some of the pressure, but the fund's girth will continue to make achieving consistently above-average future returns a challenge.

Testing Their Metals Manager
A promotion of sorts was lost in reaction to the GMO demotion. Vanguard gave long-time  Vanguard Precious Metals & Mining (VGPMX) manager Graham French a piece of  Vanguard International Growth (VWIGX) to run. French, who works for M&G Investment Management Ltd. in England has done yeoman's work running Metals & Mining. He'll use the same basic approach to pick stocks from other sectors at International Growth: He'll look for high-quality non-U.S. companies with strong cash flow and returns on equity, as well as unappreciated tangible and intangible assets. It remains to be seen, however, how he will run a more diversified portfolio, and whether it will complement or detract from the efforts of International Growth's current managers from Schroeder Investment Management North America and Baillie Gifford Overseas. Vanguard maintains that M&G has expanded the investment team behind French and that the firm has run diversified, all-world ex-U.S. portfolios successfully in the United Kingdom. I'm not as worried about this change because the fund retains the subadvisors that have achieved strong returns in the past. But it's still worth watching.

Passing the Baton
One of Vanguard's most experienced fixed income managers, Earl McEvoy of Wellington Management, recently announced he would give up his responsibilities at  Vanguard Wellesley Income (VWINX),  Vanguard High-Yield Corporate (VWEHX), and  Vanguard Long-Term Investment-Grade (VWESX), and retire in June of this year. Though I'm sorry to see a great, three-decade career come to end, I'm not worried about these three analyst picks.

Wellington Management knows how to do transitions. The firm has been planning for this moment for years and has able replacements lined up. John Keogh, who runs the bond portion of  Vanguard Wellington (VWELX) and has been with the firm for 25 years, will take over the fixed income portfolio of Wellesley Income. You may remember that last year, Wellesley Income's long-time stock manager, Jack Ryan, also said he would move aside in June to take on other responsibilities at Wellington. That means this summer, Wellesley Income will have completely new managers--but not that new. Ryan's replacement, Michael Reckmeyer III, has worked with Ryan for more than a dozen years, so I'm not that worried.

McEvoy's successors at the other funds also have solid credentials. Michael Hong, a 10-year Wellington veteran who has worked with McEvoy on High-Yield Corporate in recent years, will assume that portfolio. Lucius T. Hill III, who's been with Wellington for 15 years running core bond strategies, will take over Long-Term Investment Grade. I don't expect these funds to skip a beat.

The Munis Are All Right
Even Vanguard's sleepy municipal bond funds have seen a lot of action lately. Last year, Reid Smith and John Carbone replaced Christopher Ryon on a number of tax-exempt funds. The firm recently said Carbone, who's been running money for Vanguard since 1996, will also take over  Vanguard Insured Long-Term Tax-Exempt  from Smith. Marlin G. Brown, who has been with Vanguard for more than a decade, will also replace Pamela W. Tynan as manager of  Vanguard Limited-Term Tax-Exempt (VMLTX). The insured fund has seen some hard times recently, as the uncertain fate of bond insurers like MBIA (MBI) and AMBAC  have sent tremors through the insured municipal bond market. But I'd be surprised if these manager changes affected these funds' biggest advantage: low expenses that free the funds from having to reach for yield.

		Vanguard Fund Family Report
	Our new eight-page report gives you independent Morningstar opinion and information on these fund families each month.		It includes news, in-depth analysis on what it means for you, the best and worst funds in a family, and much more. Learn more.
	$99.00 for 12 issues