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All Contents © 2020The Kiplinger Washington Editors
By Steven Goldberg, Contributing Columnist
| September 21, 2018
Vanguard funds have become synonymous with index investing. But if you limit yourself to the firm’s passive strategies, you’ll miss some gems. Indeed, Vanguard fund managers actually invest more of their own money in the firm’s actively managed funds than in their index funds.
Vanguard has such good actively managed funds for two major reasons. One, because Vanguard is owned by its mutual fund shareholders, it has no outside owners to pay — and thus can keep its fees lower than most other fund firms. The other reason: Despite founder Jack Bogle’s advocacy of index-fund investing, he was surprisingly good at identifying talented outside stock pickers and signing them up to manage assets for Vanguard during his tenure.
Soon after Bogle founded Vanguard, he signed up Wellington Management, where he had formerly worked, to manage funds for Vanguard. Wellington runs some superb funds. His other find was Primecap, which was formed by three talented managers who left American Funds in 1983. Bogle signed them to launch Vanguard Primecap (VPMCX), one of the most successful mutual funds of the past 45 years.
Here are the five most impressive Vanguard actively managed funds that are open to new investors. (Note: Some are only available directly through Vanguard.)
Data is as of Sept. 20, 2018.
Market value: $105.7 billion
Expense ratio: 0.25%
Minimum investment: $3,000
Vanguard Wellington (VWELX, $43.28) arguably is your grandfather’s mutual fund. Launched in July 1929, Wellington is an old-fashioned balanced fund. It keeps 66% of assets in blue-chip stocks and the remainder in mostly high-quality bonds.
Edward Bousa, who has managed the stock portion for 15 years, invests about half of the equity holdings in large, dividend-paying companies with sustainable competitive advantages. The rest goes into somewhat racier large companies. Owning both types helps smooth out returns, and results in a 2.6% yield.
A few other notes:
John Keogh, who has managed the bond portion for 12 years, sticks to high-quality debt. Less than 20% of the bonds are rated BBB or lower; the rest are all single-A or higher. The bonds have a relatively long duration of 6.4 years, implying the fund should lose 6.4% in price if rates rise by 1 percentage point.
The bond holdings mean you probably won’t beat the market with this fund when stocks are rising, but you should come comfortably close. Over the past 15 years, this Kiplinger 25 mutual fund has trailed the Standard & Poor’s 500-stock index by an average of about 0.9 percentage points per year. But the ride has been much smoother: The fund has been about one-third less volatile than the S&P 500 thanks to those bonds.
Expenses are 0.25% on the investor shares, or $25 annually for every $10,000 you invest. Admiral shares (VWENX), with an initial minimum of $50,000, charge just 0.17%. The fund only is available to new investors if purchased directly through Vanguard, however.
Market value: $50.0 billion
Expense ratio: 0.38%
Vanguard Health Care (VGHCX, $226.31) is my favorite sector fund. Normally, I avoid sector funds because they tie a manager’s hands, but health care is different. Yes, the government is putting increasing pressure on health-care companies to cut costs, particularly of costly medications. But at the end of the day, health-care costs will continue to rise because demand will keep growing as the U.S. and global populations age, and because advances in medicine will continue at a rapid clip.
Health care, then, is one sector that tends to do well in both bull and bear markets.
Vanguard Health Care’s record is beyond incredible. Over the past 30 years, the fund has returned an annualized 15.8%. During the past 15 years, it returned 11.9% on average — 2.5 percentage points better per year than the S&P 500.
VGHCX is more conservative than most of its rivals. And with $50 billion in assets, it has few holdings in small, startup biotech stocks. The fund instead sticks to two broad themes: Companies coming up with innovative medical treatments and companies helping to slow the rate of increase in health care costs.
Assets are spread widely within this broad sector. Just less than half the fund is in traditional drug companies, 16% is in biotech, 12% is in health insurance companies and 12% is in medical devices.
Manager Jean Hynes, at Wellington Management, has worked on this fund since 1991. She works with a team of nine analysts, managers and research associates, including at least one physician.
The investor shares’ 0.38% expenses are low, but the Admiral shares (VGHAX, $50,000 minimum) are even cheaper at 0.33%.
Market value: $37.2 billion
Expense ratio: 0.45%
Vanguard International Growth (VWIGX, $31.06) continues to chalk up eye-popping returns. Over the past 10 years, the fund returned an annualized 7.5% — nearly double the return of the MSCI World ex-USA Index. The fund has excelled by concentrating on fast-growing large companies.
What’s more, the fund has done well lately, too, gaining 7% over the past 12 months — 6 percentage points better than the MSCI index.
Baillie Gifford Overseas runs about 60% of the fund, and Schroder Investment Management manages the other 40%. Both are respected money management firms.
Baillie Gifford is willing to pay up for companies it thinks will grow rapidly. Its managers are focused primarily on two themes: technology and emerging markets, mainly Chinese internet companies, including Alibaba (BABA), Tencent (TCEHY) and Baidu (BIDU). Schroder is less racy, investing most of its assets in stocks that offer growth-at-a-reasonable price.
The fund has excelled even though it currently has 23% of its assets in emerging markets at a time when EMs have performed horribly. A 10% stake in U.S. stocks, including Amazon.com (AMZN), has helped returns.
At the same time, this isn’t a fund for the faint of heart; it has beaten its peers in good markets but trailed in bad markets. This is a risky fund; don’t overdo it.
Market value: $59.6 billion
Expense ratio: 0.2%
Vanguard Short-Term Investment-Grade (VFSTX, $10.44) is an ideal pick for an increasingly risky bond market. It gives you just what it advertises: short-term, high-quality corporate bonds.
Thanks to rising short-term interest rates, the fund yields a healthy 3.14%. Yet the duration is only 2.5 years — meaning the fund’s price should drop just 2.5 percentage points should interest rates rise by a percentage point. In a high-quality bond fund, it’s useful to think of the duration as the fund’s risk and the yield as its reward. There are few investment-grade funds today whose yield is higher than its duration.
In bond funds, where returns often are counted in basis points (a hundredth of a percentage point), expenses are big consideration. The investor shares charge 0.2%. The Admiral shares (VFSUX), with a $50,000 minimum, charge half that (0.1%), and that discount boosts the yield to 3.24%.
This fund won’t make you rich. Over the past 10 years, it returned an annualized 3%. I think it’ll earn roughly the same in the coming years. The beauty of this fund is that it will provide ballast to your stocks, along with some income — and won’t get you killed should rates spike.
The fund is run in-house by Vanguard, which is shuffling managers on this and other bond funds. I’m not worried given how plain vanilla this fund is.
Market value: $14.7 billion
Expense ratio: 0.67%
Minimum investment: $2,000
Our final fund is a bit of a “cheat.” Primecap Odyssey Growth (POGRX, $43.48) isn’t, in fact, a Vanguard fund. It’s instead a near-clone of the aforementioned Vanguard Primecap, which, as the name suggests, is run by Primecap managers.
Vanguard Primecap is one of three Vanguard funds managed by Primecap – all of which are closed to new investors. Vanguard was wise to close them; assets were flooding in the doors because all of them, VPMCX included, are quality offerings.
Primecap Odyssey Growth is your answer if you’re shut out of VPMCX. It charges 0.67% annually – 28 basis points more than Vanguard’s near-clone, but still cheaper than the overwhelming majority of other actively managed funds.
While the two Wellington-managed funds we considered are conservative, Primecap Odyssey Growth is a pedal-to-the-metal growth shop. The fund focuses on two sectors: One-third of assets each are in technology and health care. The fund is about 46% more volatile than the S&P 500.
No, this fund is not for your conservative money.
But find an aggressive corner of your portfolio for Odyssey Growth, hang on for dear life, and eventually you’ll earn plus-size profits. The fund lagged the S&P during the 2007-09 bear market and the 2015-16 correction. But over the past 10 years, the fund returned an annualized 14.4% — an average of 3.2 percentage points per year better than the S&P 500.
Steve Goldberg is an investment adviser in the Washington, D.C., area.