Ideas from Top Vanguard Managers
Scuttlebutt from recent conversations and analyses of Vanguard subadvisors.
Some of the smartest and most experienced managers I've encountered work for Vanguard as subadvisors. Even inveterate indexers can use their insights for ideas or to set expectations for their portfolios. Here are some key takeaways from recent interviews with Vanguard subadvisors.
A Crapola Shoot
Most of the fund managers I've spoken with recently agree that the stock and bond markets' massive comebacks since March 2009 have been driven by what one Vanguard subadvisor charitably called "crapola." Ford Draper Jr., one of seven subadvisors on Vanguard Explorer (VEXPX), only slightly exaggerated in a recent report to the shareholders of his own Kalmar Growth-with-Value Small Cap (KGSCX) when he wrote that the rebound has been marked by massive relative outperformance of "lower quality/highly leveraged/smallest/lowest price/non-earning/most beaten down/highest beta/most economically sensitive stocks."
That could be the sour grapes of someone who has lagged in the rally, as Kalmar has. The data, however, back him up. Recent Morningstar fund research has shown funds owning the lowest-quality stocks bounced back much faster than those with the highest-quality holdings in 2009. Conversely, equity portfolios whose holdings had poorer average quality measures, such as higher debt/capital ratios and lower free cash-flow yields, did far worse last year than funds that scored better on those metrics. Similarly, Morningstar's individual stock data shows unprofitable firms with dubious balance sheets and market positions have done better than profitable, financially sound companies with defensible competitive advantages in 2009. Smaller also has been better this year. The Morningstar Small Cap Index's 28% year-to-date return through Nov. 30, 2009, beats the 23% gain of the Morningstar Large Cap Index.
Dan Culloton has a position in the following securities mentioned above: VDIGX. Find out about Morningstar’s editorial policies.