More Vanguard Manager Changes to Mull Over

Vanguard has continued its surprising pace of manager changes since I last did a roundup in March. There have been a total of six departures, additions, or replacements at Vanguard funds in the last four months, bringing the total number of changes this year to about 15. Here's my read on the latest batch.

The Windsor Coup
I've already written about Vanguard's decision to replace manager Dave Fassnacht of Wellington Management at  Vanguard Windsor (VWNDX) and  Vanguard Capital Value . You can read my initial take here and in the What We're Hearing section of this month's Vanguard Fund Family Report. The short story is the funds have had their troubles recently, but I was surprised Vanguard pulled the plug on Fassnacht when his counterpunching style was out of favor. His replacement at Windsor, Wellington's James Mordy, is unlikely to invest much differently because he has been a member of the same team as Fassnacht for 25 years.

Capital Value's new manager, Wellington's Peter Higgins, however, practices a much different brand of investing. Judging from his previous management stints at Dreyfus, Higgins is value-oriented and contrarian, but he also trades a lot. Higgins had a great track record at  Dreyfus Premier Midcap Value (DMCVX) before joining Wellington Management in 2005. High-turnover managers, however, bear a heavier burden of proof. It's hard overcome the transaction and tax costs that trading generates, and it's difficult to consistently make that many right trading decisions over the long term. As an admirer of Windsor and an owner of Capital Value, I'm disappointed.

A Ying for Growth Equity's Yang
In April, Vanguard added a more-sober subadvisor, Edinburgh, Scotland-based Baillie Gifford, to work alongside the aggressive Turner Investment Partners on  Vanguard Growth Equity . Since-inception manager Bob Turner has delivered what he promises. He buys firms with rapidly accelerating earnings growth and quickly sells those that disappoint, and he has stuck with that formula. It has delivered roller-coaster-like, but often rewarding, performance. The problem is few investors have been able to cope with the swings. The fund's 10-year annualized gain was 1.8% through June 30, 2008, but the typical investor lost 4.8%, according to Morningstar Investor Returns, which factor fund in- and outflows into returns.

The new subadvisor picks U.S. stocks for a small portion of the fund now, but it could change the character of the fund as its share grows. Baillie Gifford's fundamentally oriented, valuation-conscious, lower-turnover approach is almost the polar opposite of Turner's momentum-fueled, trading-intensive methods. It will take time to tell if this arrangement will improve the risk/reward profile of the fund. I know this, though: If you bought this fund for an undiluted shot of Turner's high-octane approach, you're no longer getting it.

The Scottish Are Coming
Vanguard likes doing business with Baillie Gifford. The subadvisor has managed a portion of  Vanguard International Growth (VWIGX) since 2003 and in April Vanguard also gave the firm a portion of  Vanguard Global Equity (VHGEX) to run. Baillie Gifford joins three subadvisors on the $6.8 billion Global Equity--Acadian Asset Management, AllianceBernstein L.P., and Marathon Asset Management. I don't expect much upheaval here; Baillie Gifford's international expertise and conservative growth style compliments Marathon's focused all-cap value strategy, Acadian's quantitative discipline, and AllianceBernstein's classic large-value process. It's still a decent holding, but don't expect miracles. The fund owned nearly 700 stocks before Baillie Gifford joined the lineup and will probably own more now. I expected Global Equity to continue posting solid returns, rather than the great returns it has delivered since Vanguard started adding subadvisors.

And Keep Coming
Another firm from Edinburgh has gone to work on a slice of  Vanguard International Value (VTRIX). Edinburgh Partners joined AllianceBernstein, Lazard Asset Management, and Hansberger Global Investor as the fourth subadvisor of the fund in May. I don't know a lot about Edinburgh Partners, but its cofounder, Sandy Nairn, started the firm five years ago after a three-year stint as CIO of the Scottish Widows Investment Partnership and a decade-long turn at Templeton Funds where he served as director of Global Equity Research. Nairn and his team estimate stocks' intrinsic values by projecting their earnings, cash flow, and balance sheets out five years and invest for the long term in companies whose shares are trading at big discounts to those values. The credentials and process seem sound, but I'd like to learn more about Nairn, his strategy, and his firm.

Expanding Explorer
Perhaps Vanguard thinks seven is a lucky number. Roughly four months after reducing the number of subadvisors running the closed  Vanguard Explorer (VEXPX) to six from seven, Vanguard in May added a new seventh manager to this small-growth Analyst Pick.  Century Small Cap Select (CSMVX) manager Lanny Thorndike joined Vanguard's own quant group, Granahan Investment Management, Wellington Management, Chartwell Investment Partners, Kalmar Investment Advisors, and AXA Rosenberg on the fund. That's a lot of cooks in the kitchen, and there still is a risk they'll get in each other's way. But it's hard to find fault with Vanguard's selection. Thorndike, whose Century Small Cap Select is also a small-growth Analyst Pick, is a conservative, valuation-sensitive investor who has stood out in bear markets. Century Small Cap Select gained money in the 2000-02 downturn and, so far this year, has lost less than its peers have. There is a small amount of overlap between Century Small Cap Select's portfolio and those of Explorer's existing managers. The two funds held about 44 holdings, or more than half of Century Small Cap Select's portfolio and less than 5% of Explorer's portfolio, in common as of the end of the first quarter. That doesn't raise a red flag, but I still don't expect Thorndike, who will start with a small sliver of the Explorer's assets, to significantly move this $11 billion battleship in one direction or another.

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