Why We Downgraded This Vanguard Large-Cap Fund From Gold

Concerns about the willingness of Vanguard Primecap Core’s VPCCX managers to recognize and part ways with long-term losing stock picks triggered a Process Pillar rating downgrade from High to Above Average, dropping its investor share class’ Morningstar Medalist Rating to Silver from Gold.

Subadvisor Primecap Capital Management’s focus on the long-term and extreme patience—the team often holds stocks for more than a decade—remains unique and laudable. The approach really pays off when they find and stick with firms with competitive moats and skilled leadership, but it can be a liability when the managers’ investment theses flop. They have at times been too slow to sell companies whose competitive edge has dulled, financials have weakened, or growth has waned, which has saddled the fund with steep opportunity costs. Managers can sell stocks outright when the managers think the companies have suffered significant setbacks, but they usually trim holdings when shares are up and valuations look stretched.

Despite the downgrade, Primecap’s unconventional thinking and contrarian approach have many advantages. The managers, who each run independent portfolio sleeves, are benchmark-agnostic and embrace companies with mispriced assets or turnaround potential, leading to a roughly 175-stock portfolio with value-leaning characteristics.

Key Morningstar Metrics for Vanguard PRIMECAP Core Inv

Morningstar Medalist Rating: Silver

Process Pillar: Above Average

People Pillar: High

Parent Pillar: High

Unexpected Manager Departure

Comanager John McClain’s sudden exit leaves a hole in BrandywineGlobal High Yield’s BGHSX team, leading to a People Pillar rating downgrade to Above Average from High, which dropped its Morningstar Medalist Rating to Bronze from Gold.

McClain had comanaged the fund since its inception and was known for pouncing on pricing inefficiencies in the secondary market for smaller, lesser-known issuers. The team still plans to sift this corner of the high-yield market, even though McClain was its primary trader. McClain’s departure is a loss, and the team has to resituate itself, but it still has plenty of talent.

Bill Zox, who has been on the fund since its inception and with the firm since 2001, has been integral in honing the team’s value focus. Jack Parker, who joined the management roster in early 2023, still supports Zox.

Key Morningstar Metrics for BrandywineGlobal High Yield IS

Morningstar Medalist Rating: Bronze

Process Pillar: Above Average

People Pillar: Above Average

Parent Pillar: Average

Consistent Momentum Mandate

IShares MSCI International Momentum Factor ETF IMTM has consistently shown it can perform across market cycles, earning a Process Pillar rating upgrade to Above Average from Average and boosting its Morningstar Medalist Rating to Silver from Bronze.

The passive strategy tracks the MSCI World ex USA Momentum Index, which puts more weight on stocks with strong recent past performance on the theory that they’ll continue to perform well in the near-term future. It builds on the momentum factor cited in academic studies by incorporating each stock’s historical risk when selecting names for the portfolio. It ranks all stocks in the MSCI World ex USA Index by their historical risk-adjusted price return and targets the highest-ranking names. The risk adjustment should emphasize stocks with relatively stable price growth, but it won’t prevent the portfolio from overweighting cyclical names. The strategy does not employ many constraints, so sector and country weightings can be volatile, but that also gives the strategy flexibility and avoids hurting its momentum exposure. Unsurprisingly, portfolio turnover is high, and the fund’s performance has gone in and out of favor with other momentum strategies.

Key Morningstar Metrics for iShares MSCI International Momentum Factor ETF

Morningstar Medalist Rating: Silver

Process Pillar: Above Average

People Pillar: Above Average

Parent Pillar: Above Average