I just got a letter from Vanguard indicating they'll be asking shareholders to vote to change several funds to "non-diversified". One of the funds is US Growth. I don't own it, but it strikes me as not a good idea. I'd like to know what you think about it.
The "diversified" restriction is to have less than 25% of fund assets invested in securities that account for more than 5% of total fund assets or to own more than 10% of a single issuer's outstanding voting securities. Those don't strike me as particularly restrictive. If I owned this fund, one of my goals would be diversification. Vanguard claims going to "non-diversified" "can lead to potentially better performance outcome for investors." But it sounds more like allowing the portfolio manager to turn it into a "focus" fund.
Comments
Just buy the NASDAQ 100.
MFOP shows that in its 60+ year life, the fund has returned -0.1% APR vs. the S&P 500 and its MFO Risk and MFO Rating both as 1 (Worst).
OTOH its more recent performance shows that its 10, 5, 3, 1, and YTD TR has outperformed the Index by 4.2, 6, 12.1, 27.4, and YTD 11.3% as a "diversified" portfolio but one "less differentiated from its benchmark (the Russell 1000 Growth Index) and becoming more like the Index, according to M*. Its active share percentage has dropped.
So that may be one reason why Vanguard is proposing the change IDK.
Also note that the fund has five portfolio advisers, not a single PM.
It will be interesting to see how it performs as a non-diversified product if the shareholders approve it. I don't own the fund.
https://www.sec.gov/Archives/edgar/data/52848/000168386320012214/f6514d1.htm
IMHO it's reasonable if not expected for sector funds to be non-diversified since they are already focused and they have far fewer securities to select from.
As to US Growth, ISTM that this change highlights a potential problem with funds that use multiple management firms. While each firm is selected for its style of investing, and they are intended to be complementary, they may overlap on the selection of individual securities.
Usually, even if each firm's style is focused (e.g. Jackson Square choosing 25-30 securities), a given security a firm selects can't constitute a large part of the whole fund portfolio. But, as alluded to by @WABAC, if there are "obvious" securities such as Amazon that most of the managers would independently select (regardless of investment style), then the fund could wind up holding too much of those securities.
There are a couple of ways around this. One is to weight each manager's sleeve so that the ones with heavily concentrated portfolios don't have too much influence. The other is to coordinate their sleeves or put caps on how much they can invest in a given security. The latter impedes their style and this is what it sounds like Vanguard is concerned about.
To get a sense of how three of the management teams function, one can look at PGIM Jennison Growth PJFAX (54 stocks; Amazon, Microsoft, Apple over 5%), Jackson Square-managed DUGAX (26 stocks; Microsoft, Amazon, and Visa over 5%), and Baillie Guifford US Equity Growth BGGSX (42 stocks; Amazon, Shopify, and Tesla over 9½%).
Combined, these three managers used to control 50% of the fund (with Vanguard Quant and Wellington dividing the rest). After the merger with Vanguard Morgan Growth, they control 58% of the fund. It's gotten hard to keep holdings under 5% without cramping their styles.
Figuring that this ballot measure is going to pass no matter what all the small investors vote, the more pragmatic question is: do you stay or walk? IMHO these are all fine management companies. But the portfolio holds all the usual suspects in spades. Maybe that's good, if only 5% of companies are worth owning. Or maybe you want to invest in a more wide ranging fund.