Where Will Vanguard's Latest Management Change Lead?

 The recent subadvisor shuffle at  Vanguard Morgan Growth  didn't change my opinion of the fund, but it did reveal an intriguing subplot.

Just before Thanksgiving Vanguard announced it had added two new managers to Morgan Growth, booting a veteran subadvisor in the process. Frontier Capital Management and Kalmar Investment Advisors joined the effort, while Franklin Portfolio Associates, which had run a slice of the fund for more than 18 years, departed.

I don't know a lot about Frontier Capital, other than the Frontier Mid Cap separate account run by the manager who will work on Morgan Growth, Stephen Knightly, has a strong record against similar separate accounts, mid-cap indexes, and the typical open-end mid-cap growth fund over the past three years. Kalmar is a known quantity. It has managed a portion of Vanguard Explorer for three years and has a decent long-term record at  Kalmar Growth-with-Value Small Cap .

It's always a good idea to keep an eye on a fund that gets a new manager, even a fund with multiple subadvisors like Morgan Growth. But there are no initial signs these managers, who will share 20% of Morgan Growth's assets, will foul the fund, which is also run by Wellington Management, Jennison Associates, and Vanguard's Quantitative Equity Group.

Ironically enough, the Morgan Growth changes may mean it's time to keep close watch on another fund:  Vanguard Growth & Income (VQNPX). Franklin Portfolio Associates has managed Vanguard Growth & Income for 22 years and Vanguard says it still has a lot of confidence in the firm's ability to continue running the offering. Vanguard, however, is very secretive about its subadvisor moves. It's difficult to know who is on the way in or out until the family makes a change. It also has issued similar statements of support for managers before, only to replace them later.

When Vanguard hired AXA Rosenberg, for instance, to run half of  U.S. Value , a fund that subadvisor GMO had run solo since its inception, family officials said it didn't reflect any loss of faith in GMO. Eight months later Vanguard replaced GMO on that fund and another one. I don't know if Franklin is on the way out at Growth & Income, but investors who own the fund because of its advisor should stay alert.

Distributions Dwindle
No one likes to buy a distribution. That's when you buy a mutual fund right before it pays a dividend or capital gains distribution, putting you in the dubious position of owing taxes on appreciation that you were not in the fund long enough to appreciate. That's why it pays to pay attention to fund families' capital gains distribution estimates this time of year.

When Vanguard issued preliminary capital gains distribution estimates for its mutual funds early in November, it looked like 16 funds would make payouts, some of them quite large, before the end of 2008. Revised distributions released since then indicate fewer funds will hand out gains than originally thought and those that do will make smaller payments to shareholders.

As of the end of November, 11 Vanguard funds will make capital gains distributions to shareholders.  Precious Metals and Mining (VGPMX) will make the biggest distribution as a percent of its net assets. Its $1.70 long-term gain represented more than 15% of its NAV as of Dec. 2. Though that's down slightly from the $1.95 and 17% of net assets originally projected, it's still a sizable chunk of change, so if you invest in a taxable account and were thinking of making a contrarian bet on this fund--which is down by nearly two thirds this year through Dec. 2--you'd better wait until the end of the year.

Other good funds expected to make distributions of 5% of NAV or more include the closed   Capital Opportunity (VHCOX) and  Primecap (VPMCX), the recently reopened  Health Care (VGHCX),  International Growth  (VWIGX), and  Diversified Equity  (VDEQX).

Only Health Care and Market Neutral (VMNFX) will issue short-term gains, which are taxed at the usually higher ordinary income tax rate that can be has high as 35% (long-term gains are typically taxed at 15%). Health Care's short-term gains, which emanate from securities held for less than a year, make up small part of the fund's overall distribution, while Market Neutral's $0.47 short-term gain makes up 90% of its payout. So, if you are considering adding Market Neutral to your taxable account, I'd be particularly careful about avoiding that distribution.

Funds that don't look like they will make a distribution at all now include Institutional Total Bond Market Index ,  Intermediate-Term Treasury (VFITX),  International Value (VTRIX),  Long-Term U.S. Treasury (VUSTX), and  Short-Term Treasury (VFISX).

The record date, or the day on which you have to own the fund to be eligible for the distribution, for most of the funds is Dec. 15. The record date is Dec. 29 for Diversified Equity, Market Neutral, and  STAR  (VGSTX). 

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