April 19, 2004 — Vanguard Group on Monday added portfolio managers to help oversee the Vanguard US Growth Fund (VWUSX) and the Vanguard International Value Fund (VTRIX), which have combined assets of about $9 billion.
A team from William Blair & Co. LLC joined the $7.3 billion US Growth Fund and will handle 25%-30% of its assets. The fund’s other manager, Alliance Cap Mgmt Holding L.P. (AC), will be responsible for the remainder.
A team from Alliance’s Sanford C. Bernstein & Co. LLC subsidiary was added to the $1.9 billion International Value Fund, joining Hansberger Global Investors Inc. Vanguard said it will shift 25%-30% of the fund’s assets to the new managers over the next “several” months by redirecting new investments and reallocating current assets. Hansberger, a value-oriented firm, has served as the fund’s outside manager since 2000.
The moves are aimed at improving the funds’ performance by combining teams with “complementary” investment styles, a Vanguard spokeswoman said. Bernstein is a value-oriented shop, while Blair seeks growing companies.
Blair principals James L. Barber, John F. Jostrand and Robert Truderung joined the U.S. Growth Fund. The trio also oversees Blair’s $6 million Large Cap Growth Fund. Jostrand also has run the $276 million William Blair Mutual Fds:Growth Fund/A (BGFAX) since 2001.
Henry S. D’Auria and Kevin F. Simms, Bernstein’s chief investment officers for international value equities, will manage that firm’s portion of the International Value fund.
Vanguard US Growth rQuick Take: Driven by historically high commodity prices, mutual funds that invest in natural resources stocks are surging. The average portfolio in the sector gained 43.8% for the year ended in March.
The $239-million US Global Investors Fds:Global Resources Fd (PSPFX), lead-managed by Aaron Dunn, did even better, soaring 102.6% for the 12-month period. For the three years ended in March, the portfolio rose an average annualized 31.8%, versus 8.9% for the peer group. Dunn, who joined the management team in September, 2000, is assisted by Ralph Aldis, Brian Hicks, and U.S. Global’s chief investment officer, Frank Holmes.
Reflecting the volatile nature of the commodity markets, the fund has a high standard deviation of 28.9, versus 24.8 for its peers. Its annual portfolio turnover rate of 101% is somewhat lower than the peer group.
Though the fund had an unusually high expense ratio last year, 3.75% versus 2.00% for the peer group, expenses have now been reduced to 1.42% since the portfolio’s assets have almost quintupled in 12 months.
The Full Interview:
S&P: How do you select stocks for this fund?
DUNN: We begin with a top-down process that evaluates the global environment for natural resources, currencies, political risks, and, most importantly, commodities. We then use price-risk models to derive a rough asset-allocation profile for the portfolio.
We look for companies that are highly leveraged towards a particular rising commodity. These companies should possess strong balance sheets, growing reserves, production, and cash flow. We typically purchase stocks trading at a price below the value of its underlying assets. We pay close attention to criteria such as price-to-cash-flow, enterprise value to EBITDA, five-year average revenue growth rate, and five-year-average return on capital. Essentially, we are GARP investors.
S&P: Do you have any market-cap restrictions?
DUNN: We can invest without regard to market-cap size, but the fund is mostly invested in small-cap stocks, since the resources industry around the globe is characterized by smaller-sized companies. In addition, the portfolio is dominated by foreign stocks, simply reflecting a lack of U.S.-listed resource companies. We currently have about 150 stocks in the fund. We like to keep it diversified.
S&P: What are your largest holdings?
DUNN: As of March 31: Northern Orion Resources Inc. (NTO), 3.42%; Wheaton River Minerals Ltd. (WHT), 2.33%; Energy Savings Income Fund, 1.81%; Enerplus Resources Fund (ERF), 1.73%; Bonavista Energy Trust, 1.71%; Southern African Resources PLC, 1.44%; Alcoa Inc. (AA), 1.31%; Vermilion Energy Trust, 1.29%; Focus Energy Trust, 1.28%; and Acclaim Energy Trust, 1.24%.
S&P: What is your current sector allocation?
DUNN: We have 50% in energy (oil and gas); 40% in basic materials and metals; and 10% in utilities and transportation. A year ago, we had 30% in energy and 70% in materials/metals because at that time we didn’t think the outlook for energy was too favorable.