(PUB) Investing 2016

that Vanguard close the fund and create new ones to allow the top man- agers to really add value. This won’t happen, but it should. At the start of the year, Vanguard trimmed the manager ranks, as Century Capital was fired.Vanguard also reduced Kalmar’s workload, as the sub-adviser now only invests 15% of the fund’s assets, when it previously oversaw 22%. As a result, Arrowpoint Partners, Stephens Investment Management and Vanguard’s own Quantitative Equity Group picked up more of Explorer’s assets to manage. None of these chang- es go far enough to materially improve Explorer’s fortunes. One final note: Only two of Vanguard’s 10 board members own shares in the fund, and fewer than half of Explorer’s managers have invested in it—hardly a big vote of confidence. Explorer Value Hold. When Explorer Value launched six years ago with three man- agement teams and seven portfolio managers, it was a sign that unless Vanguard was running the entire port- folio (as they are with, say, Global Minimum Volatility ), we wouldn’t see any new single-manager active stock funds from Vanguard anytime soon. So after six years, has Explorer Value proven that multimanaged funds can compete? Funny you should ask. Vanguard just fired one-third of the three-manager portfolio amalgam, handing Sterling Capital its walking papers in June. This may improve what has proven to be a >

1.2%. However, in the most recent market decline that ran from July 2015 through February 2016, MidCap Growth has lagged the index, -16.0% to -13.5%. Two for three isn’t bad, and it is fair to say that risk appears to be under con- trol, but the gains to the upside haven’t followed. Since the end of the credit crisis (February 2009), MidCap Growth has lagged all other aggressive funds in Vanguard’s stable. Smaller losses are easier to recover from, but if we only focus on down- side protection, we may miss upside opportunity. In an aggressive fund, I’m looking for managers who can take advantage when times are good as well as provide some protection when times are bad. Strategic Equity Hold. Vanguard has passed Fidelity as the largest mutual fund company in the world, but Strategic Equity had very little to do with that, even though Jack Bogle dubbed it a “Fidelity Killer” when it was launched in August 1995 as Horizon Aggressive Growth. Strategic Equity is a “quantitative” fund (meaning the computers do the stock picking) run by Vanguard’s index group. The goal is to pick the best and most “undervalued” small- and mid- cap stocks, while the 10,000-foot view of the portfolio doesn’t stray too far from its benchmark in terms of diversi- fication across industry sectors or stock weightings. Unfortunately, the computers haven’t proven capable of consistently finding

The New MidCap Growth vs. MidCap Growth Index

1.20

Rising line = MidCap Growth outperforms index fund

1.15

1.10

1.05

1.00

0.95

0.90

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decent fund over its brief life. (See the story in the July issue.) Since March 30, 2010, when the fund came out of its short subscrip- tion period, through the end of July 2016, the small-cap value fund out- paced SmallCap Value Index , 108.6% to 106.1%. A beat is a beat. So yes, it outperformed. But my analysis is that Sterling was a drag on performance, so things might be looking up here. The portfolio was trimmed back to 125 holdings from 177 in just one month— a good thing, in my view. And with just $300 million or so in assets, fund size is not a concern. Dan and I are considering putting a Buy rating on Explorer Value, but there is no rush to buy it. MidCap Growth Sell. It’s been 10 years since a com- plete management overhaul here, as William Blair & Co. and Chartwell were brought in during 2006 to turn around the ship. They’ve succeeded in tempering risk, but if you are looking for pop on the upside, you aren’t likely to find it here. Look at the relative performance chart above, which compares this fund to MidCap Growth Index . The active fund did relatively well during the 2008 credit crisis, losing 49.6% to MidCap Growth Index’s decline of 54.5%. But it was really just the five- month stretch from the end of June through November when the fund out- performed. In 2011, when MidCap Growth Index lost 3.8%, the active fund was able to hold onto gains of

Multimanaged Explorer Falling Short of the Index

Computers vs. Index...

1.60

Rising line = Strategic Equity outperforms

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AXA Rosenberg hired

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Chartwell and Vanguard added to fund

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GMO fired Century hired ▼ ▼

Stephens hired

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Century fired

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Strategic Equity vs. Extended Market Index Strategic Equity vs. MidCap Index

GMO hired ▼

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14 • Fund Family Shareholder Association

www.adviseronline.com