Vanguard Adds Manager to Explorer Fund, Changes Bogey for Three Funds

Feb. 1, 2005 -- The Vanguard Group said it has added Kalmar Investment Advisers, a money management firm that focuses on small-cap stocks, to the team of five companies that runs the $9.6 billion Vanguard Explorer Fund (VEXPX), which invests in small companies.

Vanguard also said it will change the benchmark for three of its index funds, substituting the MSCI US Broad Market Index for the Dow Jones Wilshire 5000 index. The change applies to the $57-billion Vanguard Total Stock Market Index/Inv (VTSMX), the $1.2-billion Vanguard Instl Total Stock Market/Instl (VITNX), and to the stock portion of the $7.3-billion Vanguard Balanced Index/Inv (VBINX), which also invests in bonds.

Initially, Kalmar is expected to manage a "modest portion" of the Explorer Fund's assets, Vanguard said. To minimize the tax consequences of re-apportioning assets to the firm, Vanguard said it will direct new cash inflows, and a "designated amount" of the fund's current cash holdings, to Kalmar.

At the end of 2004, Grantham, Mayo, Van Otterloo & Co. LLC managed about 28% of the fund's assets, and another 5% was held in cash. The remaining assets were split among Vanguard's quantitative equity group (24%); Grantham Investment Management Inc. (21%); Wellington Management Co. LLP (15%); and Chartwell Investment Partners (7%).

Kalmar, which oversees money primarily for institutions, manages about $1.7 billion, including the $370-million Kalmar Growth-With-Value Small Cap Fund (KGSCX). The firm looks for undervalued shares of "promising growth companies," Vanguard said.

Kalmar's portion of Explorer's portfolio will be run by Ford Draper Jr., who founded the firm and is its president and chief investment officer, Vanguard said in a regulatory filing.

Vanguard said it does not expect Kalmar's addition to the management team to have a "material impact" on the expense ratios of the funds Investor and Admiral class shares, which stand at 0.57% and 0.43% of assets, respectively.

The Explorer Fund was up 13.8% last year, versus a gain of 11.3% its small-cap growth fund peers rose. For the five years ended in December, Explorer returned 6.3%, on average, compared to a loss of 1.7% for similar funds. The portfolio is ranked 4 Stars by Standard & Poor's.

The new index being adopted, like the one it is replacing, measures the performance of the overall U.S. stock market. The MSCI index, Vanguard said, incorporates the fund company's ideas about the "best practices in index construction," including market weights that are adjusted for a stock's "float," that is, the number of shares available for purchase.

Vanguard said it does not expect the change in benchmarks to result in capital gains distributions for shareholders. The funds for which the benchmarks are being switched currently have realized capital losses that can be used to offset any realized gains, the company said. The change will require some holdings turnover, which may generate transaction costs, Vanguard said. The firm's quantitative equity group will try to minimize these costs.

The benchmark change is expected to become effective between April 1 and Dec. 31, 2005, Vanguard said. The switch will also affect the company's so-called funds-of-funds that invest in the Total Stock Market and Balanced Index funds.

Vanguard has previously adopted MSCI benchmarks for 18 of its other offerings.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.

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