Vanguard U.S. Value Fund (investor class) to be reorganized

TheShadow

https://www.sec.gov/Archives/edgar/data/836906/000168386320012215/f6527d1.htm

497 1 f6527d1.htm U.S. VALUE FUND MERGER

Vanguard U.S. Value Fund

Supplement Dated July 29, 2020, to the Prospectus and Summary Prospectus Dated January 31, 2020
Proposed Reorganization of Vanguard U.S. Value Fund into Vanguard Value Index Fund (collectively, the Funds)

The Board of Trustees of Vanguard Malvern Funds (the Trust) approved an agreement and plan of reorganization (the Agreement) whereby Vanguard U.S. Value Fund, a series of the Trust, would be reorganized with and into Vanguard Value Index Fund, a series of Vanguard Index Funds (the Proposal). The Proposal would consolidate the assets of the Funds and place U.S. Value Fund shareholders in a comparable fund with better historical long-term investment performance, deliver a large expense ratio reduction for U.S. Value Fund shareholders, and create a larger combined fund which we anticipate would achieve greater economies of scale.

The Proposal requires approval by U.S. Value Fund shareholders and will be submitted to shareholders at a special meeting to be held on or about January 22, 2021 (the Meeting). Prior to the Meeting, U.S. Value Fund shareholders will receive a combined proxy statement/prospectus requesting their votes on the Proposal. The combined proxy statement/prospectus will describe the Proposal, provide a description of the Value Index Fund, and include a comparison of the Funds. If shareholders approve the Proposal, and if certain conditions required by the Agreement are satisfied, the reorganization is expected to occur as soon as practicable after the Meeting.
Under the Agreement and after the closing, U.S. Value Fund shareholders will receive shares of the Value Index Fund in exchange for their shares of the U.S. Value Fund, and the U.S. Value Fund will cease operations.
We anticipate that the reorganization will qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.

Closed to New Accounts

Effective immediately, Vanguard U.S. Value Fund is closed to new accounts, and it will stop accepting purchase requests from existing accounts shortly before the reorganization is scheduled to occur.
© 2020 The Vanguard Group, Inc. All rights reserved.

rforno

Too bad - Vanguard does run some decent active funds.

msf

I agree with that sentiment, and would offer higher praise than "decent". But IMHO that applies to those actively managed funds that Vanguard outsourced to companies like Wellington, Primecap, and Bailie Gifford.
https://mutualfundobserver.com/discuss/discussion/56592/time-to-get-jiggy-with-vwigx
M*, Vanguard's Best Active Large-Cap Funds

I'm inclined to take a closer look at funds submanaged by these money managers regardless of the family selling the funds. OTOH, Vanguard quant funds like US Value are run in house (at least in part) by Vanguard's quant group. Ignoring for the moment the question of whether quant funds are truly active funds, Vanguard doesn't seem to excel with them.

On the one hand, you have a fund like VGIAX, where Vanguard keeps a tight leash on what the fund can do. The result with this fund is a large cap blend that tracks the S&P 500 closely (R² of 99.82%) with a slightly higher beta and lower alpha than VFIAX. Why bother?

On the other hand, you have a fund like this VUVLX, where the leash is not so tight. From M*'s writeup: "changes made in 2016 resulted in a more flexible portfolio that has struggled to deliver." Given greater flexibility, the quant group didn't deliver: 2017, 2019, 2020 (YTD) - bottom quintile; 2018 - 73rd percentile.

M* reports a similar relaxing of constraints for VSEQX in 2016, with fairly similar results (decline in relative performance).

Investopedia blames some of this on Trump, or more precisely, his random tweets that make it harder for quant funds to function. FWIW.
https://www.investopedia.com/why-quant-funds-are-stumbling-as-bull-market-rallies-4589215

msf

John Rekenthaler (M*) recently wrote a column about how Vanguard is gradually shuttering its actively managed US equity funds, specifically VULVX. He observed that Vanguard's actively managed US equity funds have not performed well relative to their Vanguard index fund peers over the past several years.
https://www.morningstar.com/articles/994649/whither-vanguards-active-us-equity-funds

I just sent him email to the effect that the fund is not actively managed, but a quant fund. His response, in part: "U.S. Value was old-school quantitative – active management through, yes, microchips. But definitely active management."

While Vanguard is reducing the number of its actively (and old-style quant) US broad equity funds, over the past decade it has added a variety of other actively managed funds.

A few that have been discussed at MFO are VGWIX, VGWLX, and VMVFX. Others include VCMDX, VMMSX, VWICX, VEIGX. A few bond funds have been added as well.

Observant1

Although Vanguard is often associated with indexing, its actively managed funds had more than $1.4 trillion AUM as of 12/31/2019. This makes Vanguard the third-largest active investment manager in the U.S. Low fees and talented management teams (e.g. Wellington, Primecap, Baillie Gifford) provide a considerable advantage.

Here are some of my favorite Vanguard active equity funds:

VHCAX, VPCCX, VPMAX - 100% managed by Primecap.
VDIGX, VWIAX, VWENX - 100% managed by Wellington.
VEIRX - 64% managed by Wellington, 34% managed by Vanguard, 1% cash.
VWILX - 66% managed by Baillie Gifford, 33% managed by Schroder, 1% cash.

Vanguard Global Equity Fund (VHGEX) is also on my radar now since two of the
subadvisors were removed (Alliance Bernstein in 2012, Acadian in 2018).

VHGEX - 50% managed by Baillie Gifford, 47% managed by Marathon, 3% cash

Some actively managed Vanguard funds have too many subadvisors which adds unecessary complexity and often results in subpar performance.

Sven

Does Marathon manage other Vanguard funds that excel?

Observant1

The Vanguard Global Equity Fund is the only Vanguard fund that Marathon advises.
Marathon has advised this fund since its inception in 1995.

From the December 2018 issue of 'The Independent Advisor for Vanguard Investors' newsletter:

"Original manager Marathon Asset Management generated strong returns when Global Equity got its start. Vanguard then added Acadian Asset Manangement in 2004 and Alliance Bernstein in 2006, and performance suffered. Baillie Gifford was hired as a fourth sub-advisor in 2008, but oversaw just 5% of the portfolio for several years."

"Since Baillie Gifford came on board in April 2008 through the end of September 2018, Global Equity returned 78.9%. Marathon's separate account was up 101.0% - meaning the fund still hasn't performed as well in its new form as it would have under Marathon's sole management. Baillie Gifford's separate account gained a terrific 136.9%. And as I said, Acadian's individual record brings up the rear with a 72.9% return."

Derf

AS of 7/31/2020:
Marathon Asset Management LLP
Baillie Gifford Overseas Ltd.

Stay Safe, Derf

Sven

@Observant1 and @msf, Thank you. I am also interested in few actively managed Vanguard funds. Learned something everyday in the Vanguard world.

msf

Not meant as a recommendation, but if you're interested in a fund with Marathon as the sole advisor, you could look at HAINX and HAIDX. M* says that the difference is that the former is restricted to developed markets. Though the latter holds just 12% in EM.

HAINX uses 8 managers from Marathon, including the two Marathon managers on VHGEX. HAIDX adds a ninth manager to the mix.

Harbor's funds are all submanaged. While Harbor's fees are not as low as Vanguard's (whose are?), they are modest for the institutional share class ($50K min) of their funds.

HAINX was a great fund in the 1990s and 2000s, managed by Hakan Castegren of Northern Cross. The fund added four Northern Cross managers in 2009. Unfortunately the remaining team did not do well with the fund, and in mid-2018 Harbor switched the fund's advisor from Northern Cross to Marathon. (Shortly after it lost the Harbor contract, Northern Cross shut down.)

Sven

Thank you. Back in the 1900 I invested with Hakan Castegren of Harbor International fund until his passing. The rest of the Northern Cross team did not live up to Hakan Castegren and I left several years later. Marathon is fair and nothing outstanding as subadvisor for Harbor International fund.

I am actually more interested in James Anderson of Baillie Gifford who has very good long term track record. They appear to be institutional fund managers. Similar international growth and global Baillie Gifford funds are not available in the retail Fidelity and Schwab brokerages. So I will stay with Vanguard International Growth fund.