Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
Vanguard US Growth & Growth and Income - Subadvisor Change
"Vanguard has dropped its quantitative equity team as a subadvisor on the $34.4bn Vanguard US Growth fund and $11.5bn Vanguard Growth and Income fund."
"On the US Growth fund, no new subadvisor has been added alongside Baillie Gifford, Jennison Associates and Wellington Management Company, but the latter firm will now run more of the fund’s assets as a result of Vanguard removing itself."
"Wellington has also been added as a subadvisor on the Growth and Income fund, joining existing subadvisors D.E. Shaw Investment Management and Los Angeles Capital Management."
I don't know why Vanguard's quant team was removed from Vanguard US Growth. I assume their absolute returns were subpar and/or their strategy didn't gel with the other subadvisor's strategies.
Jackson Square Partners was dropped from Vanguard US Growth in 2021. Here's what Dan Newhall had to say at the time:
"'We employ a rigorous evaluation process in overseeing our funds and advisors to ensure we provide sound, enduring offerings that meet the long-term needs of our clients,’ said Dan Newhall, head of global oversight and manager search for Vanguard’s portfolio review department. After careful review, we have concluded that the new advisory arrangements have the best prospects of delivering valuable outcomes to the funds’ shareholders."
Vanguard will never publicly state that a subadvisor was removed for performance reasons. So, is the subadvisor lineup for US Growth stable now or should we expect additional changes in the future?
I think you are right. Baillie Gifford and Jennison are well respected growth managers. So it make sense to have them on this team. Wellington is more of value oriented. So this would be tough to gel with the other growth teams while driving US Growth fund. Sometime too many cooks in the kitchen is not the best.
Vanguard Quantitative Group is small - only 2-3 dozen total employees. It manages alternatives, factor-based ETFs, some non-VG funds, and when needed, portions of some VG mutual funds. At some point, VG has to decide whether to expand it or use its outside subadvisor model. I am sure VG won't fire itself unless it decides to make a change itself.
The Vanguard Quantitative Equity Group will still manage (partially or entirely) 5 active funds. Link
I agree with @Sven that sometimes there are "too many cooks in the kitchen." Vanguard had 10 active funds with 3 or more subadvisors as of 03/31/2023. Link
Excluding Vanguard (Fixed Income Group and Quantitative Equity Group), these are the only firms which manage 100% of any active Vanguard funds: Wellington Management, Primecap Management, Baillie Gifford Overseas, and Ninety One North America (newer ESG fund).
Sometimes I wish Vanguard would adopt Harbor funds model when it comes to choosing their subadvisors. Harbor typically uses a single advisor for each fund, and they get swapped out if they don’t meet their expectation on performance. A single advisor would allow the manager(s) to focus and execute their strategy whereas multiple managers can add more complexity rather than more value to the fund. One exception I can think of is Vanguard International Growth, VWILX, where Baillie Gifford Overseas and Schroder (both growth managers) work well together for many years.
I don't like the Vanguard model of multiple subadvisors either, but the different subadvisors aren't actually working together at all. I saw an interview with one subadvisor and they said they never spoke with other subadvisor once and didn't know anything about them. They just independently manage their own sleeve. It is like owning two different funds essentially, but you only have visibility into the combined results. Like yourself, I'd prefer if Vanguard kept it to one subadvisor like they do with VHCOX and VWELX, but I guess they do it to be able to handle more AUM, although I am sure they'd position it as better diversification.
My guess is that Vanguard is playing a low-cost hardball with subadvisors.
ONE subadvisor may be lured by big AUM initially, or may be in the early stages of its business, but it may later want more money or may just close the funds (e.g. PRIMECAM subadvised funds). We also saw this when Vanguard Windsor II was started years ago, and other advisors were added as its AUM grew (to higher AUM than the original VG Windsor) - and now, the initial advisor isn't even in the picture.
Vanguard tries to play its multiple subadvisors against each other using AUM shifts as carrots and sticks, and they are accountable to Vanguard only, not to each other. But what may be a good idea with 2 subadvisors, becomes problematic with 4 or more subadvisors. Many VG funds with too many subadvisors have issues (VG Explorer, etc) in that VG and/or subadvisors don't know what they are doing.
VG can be tough - it did fire GMO for funds, and MSCI on indexing. VG also shutdown VG Convertible that was subadvised by Oaktree Capital (co-owned by famed Howard Marks).
There is a saying, there can be too much of a good thing, or, that cake is good for dessert, but you cannot live on it. It's the same with subadvisors - 2 may be good, but 4 are bad.
A fund's board is responsible for hiring the fund's advisor(s). It may be a distinction without a difference, but at Harbor, a board hires the fund's advisor, which in turn hires the subadvisors. In contrast, at Vanguard a board hires multiple advisors directly. There are no subs.
Harbor Capital Advisors, Inc. (“Harbor Capital” or the “Advisor”) is the investment adviser to Harbor Funds. ...
The Advisor may manage funds directly or employ a “manager-of-managers” approach in selecting and overseeing investment subadvisers (each, a “Subadvisor”). The Advisor makes day-to-day investment decisions with respect to each fund that it directly manages. In the case of subadvised funds, the Advisor evaluates and allocates each Harbor fund’s assets to one or more Subadvisors. For Harbor funds that employ one or more discretionary subadvisors, the Subadvisors are responsible for the day-to-day management of the assets of the Harbor funds allocated to them.
For funds that are advised by independent third-party advisory firms unaffiliated with Vanguard, the board of trustees of each fund hires investment advisory firms, not individual portfolio managers, ...
... the [third-party] advisor manages the investment and reinvestment of the portion of the fund’s assets that the fund’s board of trustees determines to assign to the advisor. In this capacity, each advisor continuously reviews, supervises, and administers the fund’s investment program for its portion of the fund’s assets. ... Each advisor discharges its responsibilities subject to the supervision and oversight of Vanguard’s Portfolio Review Department and the officers and trustees of the fund. Vanguard’s Portfolio Review Department is responsible for recommending changes in a fund’s advisory arrangements to the fund’s board of trustees, including changes in the amount of assets allocated to each advisor and recommendations to hire, terminate, or replace an advisor.
Yogibearbull largely has the subadvisor model correct here. If Vanguard hires a single subadvisor for, say, 0.50%, and that subadvisor has its own branded funds that it charges 1% for, what is the motivation for investors to buy any of the subadvisor's higher-cost branded funds? A single sub-advisor Vanguard fund runs the risk of cannibalizing that sub-advisor's external business. But a multi-advisor fund will be different and therefore there is less risk of cannibalization. Vanguard can play the subs off against each other on cost. Wellington and Primecap are interesting exceptions, but then Primecap only opened its branded funds when Vanguard closed its Primecap subadvised ones to new investors, so there was less risk of cannibalization. Meanwhile, Wellington has been with Vanguard since its founding, and the relationship there is a unique and enduring one. Wellington originally fired John Bogle, motivating him to found Vanguard.
If Vanguard hires a single subadvisor for, say, 0.50%, and that subadvisor has its own branded funds that it charges 1% for, what is the motivation for investors to buy any of the subadvisor's higher-cost branded funds? A single sub-advisor Vanguard fund runs the risk of cannibalizing that sub-advisor's external business. ... Wellington and Primecap are interesting exceptions, but then Primecap only opened its branded funds when Vanguard closed its Primecap subadvised ones to new investors, so there was less risk of cannibalization. Meanwhile, Wellington has been with Vanguard since its founding, and the relationship there is a unique and enduring one.
Does Wellington have its own branded funds? It doesn't seem to fit this pattern.
Primecap (VPMCX) opened and closed at various times. If Primecap was waiting until the Vanguard funds closed, it looks like the third time was the charm.
The initial management fee of 0.60% was slightly higher than the Vanguard management fee at the time of 0.48%. Though counterbalancing that relatively slight difference was the five year redemption fee that Vanguard imposed and Primecap Odyssey did not.
Yogi may be right about a new company looking to grow AUM, even if it has to give up 20 basis points in fees. Though if that were its objective, Vanguard hasn't been too successful at that. Each fund has only about $40M AUM, and looking at the Vanguard fund, half of its AUM came at launch (seed money?).
quick question : how must one query mfopremium to list all advised and subadvised vehicles? (e.g., Wellington, oaktree, primecap, etc...) [ANSWERED IN PREMIUM]
Comments
I assume their absolute returns were subpar and/or their strategy didn't gel
with the other subadvisor's strategies.
Jackson Square Partners was dropped from Vanguard US Growth in 2021.
Here's what Dan Newhall had to say at the time:
"'We employ a rigorous evaluation process in overseeing our funds and advisors to ensure we provide sound, enduring offerings that meet the long-term needs of our clients,’ said Dan Newhall, head of global oversight and manager search for Vanguard’s portfolio review department. After careful review, we have concluded that the new advisory arrangements have the best prospects of delivering valuable outcomes to the funds’ shareholders."
Vanguard will never publicly state that a subadvisor was removed for performance reasons.
So, is the subadvisor lineup for US Growth stable now or should we expect additional changes in the future?
Link
I agree with @Sven that sometimes there are "too many cooks in the kitchen."
Vanguard had 10 active funds with 3 or more subadvisors as of 03/31/2023.
Link
Excluding Vanguard (Fixed Income Group and Quantitative Equity Group),
these are the only firms which manage 100% of any active Vanguard funds:
Wellington Management, Primecap Management, Baillie Gifford Overseas,
and Ninety One North America (newer ESG fund).
https://www.sec.gov/ix?doc=/Archives/edgar/data/799127/000168386323004868/f25639d1.htm
From Vanguard:
https://corporate.vanguard.com/content/corporatesite/us/en/corp/who-we-are/pressroom/press-release-vanguard-announces-advisory-changes-for-two-equity-funds-052623.html
Thanks!
Since 2022, Harbor offer actively managed ETFs so that you can gain access to these excellent managers from your brokerages.
https://harborcapital.com/products/all/etf
ONE subadvisor may be lured by big AUM initially, or may be in the early stages of its business, but it may later want more money or may just close the funds (e.g. PRIMECAM subadvised funds). We also saw this when Vanguard Windsor II was started years ago, and other advisors were added as its AUM grew (to higher AUM than the original VG Windsor) - and now, the initial advisor isn't even in the picture.
Vanguard tries to play its multiple subadvisors against each other using AUM shifts as carrots and sticks, and they are accountable to Vanguard only, not to each other. But what may be a good idea with 2 subadvisors, becomes problematic with 4 or more subadvisors. Many VG funds with too many subadvisors have issues (VG Explorer, etc) in that VG and/or subadvisors don't know what they are doing.
VG can be tough - it did fire GMO for funds, and MSCI on indexing. VG also shutdown VG Convertible that was subadvised by Oaktree Capital (co-owned by famed Howard Marks).
There is a saying, there can be too much of a good thing, or, that cake is good for dessert, but you cannot live on it. It's the same with subadvisors - 2 may be good, but 4 are bad.
Wellington and Primecap are interesting exceptions, but then Primecap only opened its branded funds when Vanguard closed its Primecap subadvised ones to new investors, so there was less risk of cannibalization. Meanwhile, Wellington has been with Vanguard since its founding, and the relationship there is a unique and enduring one.
Does Wellington have its own branded funds? It doesn't seem to fit this pattern.
Primecap (VPMCX) opened and closed at various times. If Primecap was waiting until the Vanguard funds closed, it looks like the third time was the charm.
In 1994, its minimum was $3,000 (or $10,000; the prospectus is gives both figures). March 7, 1995, Vanguard closed the fund and limited additional investments to $25K/year. On Jan 1, 1996, Vanguard unambiguously reduced the minimum to $3K, were fund were to reopen. On Oct 31, 1996, the fund did reopen. The fund was closed again on April 22, 1998, with a $25K/year limit on additional investments. On April 23, 2001, the fund once again reopened, but this time with a $25K minimum and a 1% redemption fee for shares redeemed within five years of purchase. Finally, several months after Vanguard closed the fund again on March 4, 2004, Primecap Odyssey launched its funds in November 2004.
The initial management fee of 0.60% was slightly higher than the Vanguard management fee at the time of 0.48%. Though counterbalancing that relatively slight difference was the five year redemption fee that Vanguard imposed and Primecap Odyssey did not.
An exception that may prove the rule is Vanguard Global Environmental Opportunities Fund (VEOIX). It began Nov 22, 2022, a bit more than a year after the management firm, Ninety One, started it own fund, Global Environment Fund ZGEIX.
Yogi may be right about a new company looking to grow AUM, even if it has to give up 20 basis points in fees. Though if that were its objective, Vanguard hasn't been too successful at that. Each fund has only about $40M AUM, and looking at the Vanguard fund, half of its AUM came at launch (seed money?).
[ANSWERED IN PREMIUM]