Vanguard International Explorer Fund adds Baillie Gifford Overseas Limited

TheShadow

https://www.sec.gov/Archives/edgar/data/1004655/000168386320012719/f6675d1.htm

497 1 f6675d1.htm VANGUARD INTERNATIONAL EXPLORER FUND SUPPLEMENT

Vanguard International Explorer™ Fund
Supplement Dated August 24, 2020, to the Prospectus and Summary Prospectus Dated February 27, 2020
Restructuring of the Investment Advisory Team
The Board of Trustees of Vanguard Whitehall Funds, on behalf of Vanguard International Explorer Fund (the Fund), has approved a restructuring of the Fund’s investment advisory team, adding Baillie Gifford Overseas Limited (Baillie Gifford) as a new investment advisor to the Fund.

The Fund operates under the terms of an SEC exemption, whereby the Fund’s Board of Trustees may, without prior approval from shareholders, hire a new advisor.

Effective immediately, Baillie Gifford manages a portion of the Fund’s assets along with the Fund’s existing advisors. Each advisor independently selects and maintains a portfolio of common stocks for the Fund. The Fund’s Board of Trustees determines the proportion of the Fund’s assets to be managed by each advisor and may change these proportions at any time.

In connection with the addition of Baillie Gifford to the Fund, effective immediately, Brian Lum and Stephen Vaughan are added as co-portfolio managers of the Baillie Gifford portion of the Fund.

Also effective immediately, the following other changes to the Fund’s investment advisors are made:

•  Mary L. Pryshlak, who leads Wellington Management Company LLP’s (Wellington Management) International Small Cap Research Equity team, is added as a portfolio manager of the Wellington Management portion of the Fund. She replaces Simon Thomas, who led the International Small Cap Equity team managing Wellington Management’s portion of the Fund since 2010. Mr. Thomas is removed as a portfolio manager of the Fund, and all references to Mr. Thomas and corresponding disclosure related to Mr. Thomas in the Fund’s Prospectus and Summary Prospectus are hereby deleted.
•  Luke Biermann is added as a co-portfolio manager for Schroder Investment Management North America Inc.’s (Schroders) portion of the Fund, joining existing Schroders portfolio manager Matthew Dobbs who will be retiring from that role at the end of March 2021...

LewisBraham

An interesting choice: https://bailliegifford.com/en/usa/professional-investor/funds/baillie-gifford-international-smaller-companies-fund/

Sven

Why add a third subadvisor if Wellington and Schroeder could not provide a cocnsistent performance?

Observant1

TimesSquare Capital Management is the fourth subadvisor for the Vanguard International Explorer Fund. I see no advantage in having so many subadvisors. If Vanguard's Oversight and Manager Search team conducted proper due diligence, why would more than two subadvisors be needed? IMHO, this is a detrimental feature of several actively managed Vanguard funds.

Sven

That was my point of having too many cooks in a kitchen. Unless they work well together, they tend to dilute the strategy as well as the fund's performance. If the asset gets too large, closing the fund would make more sense.

PRIMECAP as the subadvisor to Vanguard's Primecap, Primecap core and Capital Opportunity funds. These excellent funds are closed to new investors. In my opinion, they should be closed long ago.

Observant1

Sven said:

That was my point of having too many cooks in a kitchen. Unless they work well together, they tend to dilute the strategy as well as the fund's performance. If the asset gets too large, closing the fund would make more sense.

I totally agree with you.

LewisBraham

Imagine you're a money manager of an international small-cap fund with an excellent performance record but limited assets. Suddenly, Vanguard comes knocking on your door and says would you like to subadvise one of our funds and receive billions more in assets? The only problem is Vanguard will pay you a base management fee of 0.40% to run the fund, which with administrative costs, will run to a total expense ratio of 0.50% if the fund matches its benchmark. (If the fund lags, you'll receive even less than your 0.40%.) Now imagine that your current fund has a management fee of 1.0% and a total expense ratio with administrative costs of 1.50%. Would you agree to be the sole subadviser of that Vanguard fund and thereby cannibalize your own business by running a Vanguard clone of your fund for one-third the cost? Now let's say Vanguard tells you, hey, don't worry there will be two other subadvisers of this fund, so its portfolio won't be identical to yours. Then the proposition becomes much more attractive. The question is can Vanguard get the right group of subadvisers who can collectively outperform? Vanguard points out, correctly albeit incompletely, that funds with multiple subadvisers have the advantage of smoothing out performance as different managers' styles come in and out of favor. If you combine a top international small-cap value manager with a top international small-cap growth one, hopefully when growth is in favor and value isn't the fund still does reasonably well, and vice versa. The question is can Vanguard get the mix of subadvisers right? Evidently with VINEX this has been a problem. But it is possible now that this new sub has been added another one of the subs that's underperforming will be eliminated.

msf

For the most part, I agree with you. If I liked the funds run by each management company, I might purchase 2-3 of them, perhaps because I couldn't decide, perhaps because I wanted to diversify management risk. Either way, I'd get the same result as Vanguard is getting, except I'd be paying more.

This is why I find VWIGX so intriguing. SCIEX (Schroder) and BGESX (Baillie Gifford) keep popping up on my radar.

But ... the scenario you described, or something like it, is how VINEX came to be. In early 2002, Schroder International Smaller Companies Fund SSCIX had an enviable long term record, though it had underperformed its benchmark in the previous one year.

Fund vs. Benchmark: (1 year) -22.52% vs. -16.38%; (5 yr) 9.19% vs. -1.31%; (10 yr) 8.73% vs. -1.41%
Schroder Funds 2002 Prospectus

This "international small-cap fund with an excellent performance record but limited assets" (around $26M) agreed to be acquired by Vanguard and to become VINEX. Schroder would remain the sole manager. Vanguard agreed the new fund would pay management fees of 0.66%. Along with "other expenses" of 0.09%, it projected the total ER of the new fund to be 0.75%. Under Schroder, the fund's stated management fees alone were 1.10%.

Since Schroder was turning over the whole fund to Vanguard, it would not be cannibalizing a competing fund it ran. In addition, because Schroder had been waiving 0.69% in fees and/or expenses in its fund, Schroder may have anticipated little if any decline in the actual rate of fees it would collect, net, under Vanguard. But even if wound up receiving a lower rate, it had so much to gain with Vanguard's marketing behind it, that what it lost in price it would more than made up in volume.

Given the competitive nature of the mutual fund industry, Schroders determined that it would be prudent to enter into an arrangement with Vanguard. Joining The Vanguard Group should enable the Schroder Fund (as reorganized into the Vanguard Fund) to grow assets due to Vanguard's strong market penetration and reputation as a low-cost provider. Schroders expects (but cannot guarantee) that assets in the reorganized Schroder Fund will grow considerably once it joins The Vanguard Group as the result of investments by new shareholders, which would result in a larger, more stable asset base for the reorganized Schroder Fund. As a result, expenses would be shared by a larger group of shareholders and expenses for existing shareholders may be reduced.

Vanguard 497 filing