OMG! Vanguard Shows GMO The Door
Vanguard U.S. Value (VUVLX) and Vanguard Explorer (VEXPX) may be among the cheapest actively managed value and growth funds (respectively) around, but Vanguard apparently has had it with their lagging performance:
Vanguard's Quantitative Equity Group (QEG) has begun managing the portions of Vanguard U.S. Value Fund and VVIF–Small Company Growth Portfolio previously managed by Grantham, Mayo, Van Otterloo & Co., LLC (GMO). QEG has also assumed primary responsibility for the assets previously managed by GMO for the Vanguard Explorer Fund.
QEG joins AXA Rosenberg Investment Management LLC as a co-advisor for Vanguard U.S. Value Fund. QEG now oversees approximately one-third of the fund, employing a quantitative investment approach to select stocks from the Russell 3000 Value Index that it deems attractive.
QEG will share advisory responsibilities with Granahan Investment Management for managing VVIF-Small Company Growth Portfolio. The firm will also expand its portfolio management role for Vanguard Explorer Fund, assuming responsibility for most of GMO's former portfolio, with the remainder allocated to the other advisors of the fund.
"Vanguard brings a vast amount of experience and expertise to its quantitative mandates and the funds' boards of trustees are highly confident in the group's ability to complement the strategies of the existing advisors and produce competitive long-term returns," said Mr. Brennan. "GMO has provided advisory services to Vanguard funds since 2000 and, on behalf of our shareholders, we thank them for their efforts."
Vanguard U.S. Value has been a fund favorite around here since 2002, largely because of low fees, and GMO's detailed and often doomsday-grade outlooks on the U.S. markets. While a MAXfunds favorite it has beat the S&P 500, but more recently the fund's managers have made some missteps. We have downgraded our outlook for large cap value funds in general due to years of outperformance and asset growth at many value funds - but this fund has underwhelmed in a weak category recently. In 2007 the fund underperformed the Russell 1000 Value Index (an index of larger cap value stocks) by about a half percent. In 2006 the fund missed the mark by around eight percent.
GMO (Grantham, Mayo, Van Otterloo) uses a quantitative take on value investing: like many other value managers, they screen for low value stocks (preferably ones that are unpopular with other investors) by looking at their interpretation of intrinsic value and price-to-normalized earnings. In addition, they look for stocks with some positive momentum. Unfortunately, this screen put GMO into too many retailers like Home Depot (HD), Dollar Tree Stores (DLTR), and Kohl's (KSS), financial services companies like Citigroup (C), Bank of America (BAC) and First American (FAF), and healthcare stocks like Pfizer (PFE), Merck (MRK), Unitedhealth (UNH).
GMO manages some $150 billion (and falling after this news...) largely in foreign stocks. GMO's own foreign funds (institutional funds) have done well next to competitors, however, their own U.S. stock funds have performed near the bottom of the heap.
The funny thing is we expect GMO's foreign funds to have more problems going forward than their domestic funds. By dumping GMO, Vanguard is in effect playing the same game they tell us not to play: performance chasing. (Or perhaps Vanguard just wants to manage more of their portfolios themselves. Better for profit margins...)
We are currently reviewing U.S. Value for possible expulsion from Our Favorite Funds lists, large cap value category.
it's not performance chasing to get rid of a poor performer. this fund isn't the same as it started out when it was just GMO in charge.