(PUB) Investing 2016

MULTIMANAGERS Maybe Two Heads Aren’t Better Than One

is being made at its International Annuity clone.) M&G maintains its manager duties on Precious Metals & Mining and Emerging Markets Select Stock . International Growth has been out- performing Total International Stock Index consistently for much of the last decade and has been a component of my Model Portfolios for many, many years as one of Vanguard’s best foreign stock funds. I think this is a great change, as I have a ton of respect for the folks at Baillie Gifford as well as the Schroder group. But what’s amusing about this change is that International Growth is the one multimanaged fund that Vanguard regularly uses as evidence for the benefits of many “cooks in the kitchen.” Oops. Vanguard’s press release on both the Capital Value and International Growth changes was about the tersest I’ve seen in many years. As always, they don’t say much about why they make these changes, but I can guess that performance was an issue, as it almost always is. It was just June when Vanguard trimmed the management at Explorer Value from three to two firms by firing Sterling Capital Management, something I discussed in the July 2016 issue, after critiquing Vanguard’s defense of multimanagement in the June 2016 issue. I continue to believe that larding up funds with too many managers simply spoils performance and is not in inves- tors’ best interests. It may make sense from a marketing point of view to have active funds whose performance never deviates too far from benchmarks, but from the shareholders’ points of view, it’s a lousy way to run a portfolio. With the manager change, Capital Value remains a work in progress, but I am very, very satisfied with the reduction in managers at International Growth. n

WILL 2016 BE REMEMBERED as the year that Vanguard tacitly admitted that its multimanager strategy doesn’t work? Just days after posting yet another defense of its multimanager strategy on its website, Vanguard announced it was trimming managers at Capital Value and International Growth . Capital Value, which has been run by a succession of Wellington Management portfolio managers as a solo fund and was converted to a two- manager fund at the end of 2009, is going back to its roots with David Palmer, a senior managing director at Wellington, as its sole manager. In a somewhat candid admission, Vanguard told Pensions & Investments that “upon a thoughtful deliberation, [it] determined that a single manager structure with David Palmer provides the investment approach, experience and expertise that will best serve share- holders going forward.” It was a little more than six years ago when Vanguard said that adding Palmer to the fund, which at the time was run solo by Peter Higgins, would “moderate the fund’s volatility.” I took a quick look at the fund’s volatility when Higgins ran it solo, as well as when he and Palmer were running it together, and I found that whether the co-management situation actually reduced volatility is a matter of inter- pretation. I couldn’t find compelling evidence that, over the six-and-a-half- year period the two worked in tandem, Capital Value was any less “volatile” than it was under just Higgins. Take a look at the chart above, in which I’ve traced Capital Value’s relative performance against its Russell 3000 Value index benchmark. The graph begins with Higgins’ appoint- ment to the fund, and shows when Palmer joined him. To my eyes, the wicked outperformance at the begin- ning of the period is matched by the wicked underperformance towards the

Capital Value vs. Russell 3000 Value

1.45

Rising line = Outperformance

1.35

1.25

▼ Palmer added to fund

1.15

1.05

0.95

0.85

0.75

6/08

6/09

6/10

6/11

6/12

6/13

6/14

6/15

6/16

end of the period. I don’t think I’ve ever seen a relative performance chart that is this extreme. One reason for the extremes is that performance has been so highly uncor- related with the benchmark. During Higgins’ solo period, Capital Value gained an annualized 9.8% while the Russell 3000 Value index lost an annu- alized 8.2%. Under the dual manager setup, Capital Value compounded at a 7.6% annual rate, while the index compounded at 11.9%. Big disparities in performance during both periods. I can’t tell you how Capital Value will fare under David Palmer’s solo stewardship. Jeff and I are going to reassess our three-year trading strategy for Capital Value given the potential for lower volatility, if that’s what truly hap- pens. Stay tuned on that one. A Real Improvement International Growth, dating to 1981, is one of Vanguard’s oldest funds, and its absolute oldest for- eign stock fund. Vanguard calls it a restructuring, but in essence, they’ve fired M&G Investment Management, reducing the fund’s management ros- ter from three to two. This leaves Schroder Investment Management and Baillie Gifford as the remaining management teams on the fund—in my estimation, a smart and wel- come change. (The same change

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