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All Contents © 2017The Kiplinger Washington Editors
Vanguard is the biggest fund company in the land, with more than $3 trillion in assets. So chances are high that many retirement savers have access to Vanguard funds in their 401(k) plans. But size is no guarantee of good results.
Thirty-four Vanguard funds appear on a list of the 105 most popular mutual funds in employer-sponsored retirement savings plans. No other fund company comes close. Not surprisingly, of the 34 most popular Vanguard funds in retirement plans, 15 are index funds. And nine more are target-date portfolios—those set-it-and-forget-it funds that shift over time to more conservative allocations as the fund nears its target year. The remaining 10 are actively managed.
We didn’t analyze each individual index fund. For starters, Vanguard’s index offerings are well-managed and charge low fees. In other words, they come close to matching their underlying benchmarks. Your toughest decision with them boils down to which markets you want to track or which swath within a particular market you want to match. That’s why we focused on the actively managed funds that appear on the list, as well as Vanguard’s target-date fund series. Each warrants a closer look because investors need to understand what they’re buying. We rate the 10 actively managed funds and the collection of target-date funds Buy, Sell or Hold based on our analysis of the funds' performance and prospects. A Buy rating indicates the best Vanguard funds for your retirement savings from among the group of funds analyzed.
The list of funds, based on 401(k) assets under management, was generated for Kiplinger by BrightScope, a financial-information company that rates retirement-savings plans. The funds are listed in alphabetical order. We used data for the Investor share class for each fund, but your retirement plan may offer a different share class that presumably charges a lower fee. Note that some of the actively managed funds on this list are closed to new investors. But some funds that are nominally closed may be open to participants in a 401(k) plan. Returns are as of October 11.
By Nellie S. Huang, Senior Associate Editor
| Updated November 2016
Expense ratio: 0.45%
Assets: $13.7 billion
One-year return: 9.9%
Three-year annualized total return: 11.4%
Five-year annualized total return: 17.5%
Ten-year annualized total return: 9.0%
Capital Opportunity is closed to new investors, but you’re in luck if the fund is offered in your employer-sponsored retirement-savings plan—that rule doesn’t apply.
Primecap Management has run Capital Opportunity since 1998. Each of the fund’s five managers independently runs his own slice of the fund’s assets. But they all follow the same approach, focusing on large and midsize companies with strong growth potential that are trading at bargain prices. When they buy, they hold: The fund has a low turnover ratio of 7%, which implies that the managers typically hold a stock for more than a decade. Since Primecap took over Capital Opportunity, it has returned 13.4% annualized, beating Standard & Poor’s 500-stock index by an average of 7.2 percentage points per year.
Note: On November 15, 2016, we changed our rating on this fund from Hold to Buy.
Expense ratio: 0.49%
Assets: $11.4 billion
One-year return: 5.6%
Three-year annualized total return: 5.1%
Five-year annualized total return: 13.4%
Ten-year annualized total return: 7.1%
Once upon a time, Explorer was a solid, aggressive small-company stock fund. Now it’s “a poster child” for the “watered-down” results that come from funds that have multiple managers, says Dan Wiener, editor of The Independent Adviser for Vanguard Investors, a newsletter. Wiener is referring to Vanguard’s penchant for divvying up the assets of a large fund among multiple subadvisers. In this case, Explorer has 14 managers who hail from seven subadvisers. Vanguard believes the different stock-picking approaches of the advisory firms will complement each other and ultimately bolster the fund’s performance.
But Explorer’s results have been subpar. In eight of the past 11 calendar years (including so far in 2016), the fund has trailed its chosen benchmark, the Russell 2500 Growth index (which tracks stocks of 2,500 fast-growing small companies). On a trailing basis, it falls behind, too. Over the past 10 years through October 11, Explorer lagged its bogey by an average of 1.2 percentage point per year.
Explorer’s multi-manager setup has other problems. For one thing, Vanguard doesn’t publish each firm’s results separately. Moreover, subadvisers have taken control over a portion of the fund’s assets at different times (one firm, Wellington Management, came on as early as 1994; the latest additions, in 2014). Since they all started working as a group in June 2014, the fund has returned 3.9% annualized, trailing the Russell 2500 Growth index by an average of 1.4 percentage points per year.
A better bet, if it is available in your plan, is Vanguard Small Capitalization Index (NAESX). It has outpaced Explorer in seven of the past 11 calendar years (including so far in 2016). As its name indicates, the fund simply seeks to mimic an index—in this case, the CRSP US Small Cap index (CSRP stands for Center for Research in Security Prices).
Expense ratio: 0.20%
Assets: $25.3 billion
One-year return: 5.0%
Three-year annualized total return: 2.1%
Five-year annualized total return: 1.6%
Ten-year annualized total return: 4.3%
This actively managed fund does what it’s supposed to do. It invests in Treasury inflation-protected securities, or TIPS, which provide a hedge against rising consumer prices. These bonds, which are backed by the full faith and credit of the U.S. government, pay a modest guaranteed return above the rate of inflation. But the fund currently pays a negative yield in part because of the double whammy of generally low expectations for inflation and the persistently low interest-rate environment.
That hasn’t prevented manager Gemma Wright-Casparius from generating a positive return for investors, albeit a small one. Since she took over in August 2011, the fund has returned an annualized 1.3%. It’s not much, but it beat 88% of funds that invest in inflation-protection bonds. The annual rate of inflation over that time has dropped from 3.0% in 2011 to 0.8% in 2015, according to the Bureau of Labor Statistics.
Our main concern about the Vanguard fund is that it is highly sensitive to changes in interest rates. The fund’s average duration, a measure of interest-rate sensitivity, is 8.4 years. That implies that if rates were to rise by one percentage point, the fund’s share price would fall by 8.4% (bond prices and interest rates move in opposite directions). By contrast, the Bloomberg Barclays US Aggregate Bond index, a measure of the broad U.S. bond market, has a duration of 5.6 years. With rates more likely to rise than to fall from today’s microscropic levels, this fund looks too risky.
Expense ratio: 0.47%
Assets: $23.0 billion
One-year return: 6.5%
Five-year annualized total return: 8.0%
Ten-year annualized total return: 3.9%
Vanguard said so long to one of this fund’s subadvisers earlier this year, leaving in place just two: Baillie Gifford Overseas runs about 60% of the fund’s assets, and Schroders Investment Management handles the rest. Schroders has run all or part of the fund since 1981; Baillie Gifford, since 2003.
The two advisers take a slightly different approach to fulfilling the fund’s mission: to invest in large, growing companies based outside the U.S. The folks at Baillie Gifford are willing to pay a premium for firms with good long-term growth prospects. Schroders favors shares of growing firms that trade at reasonable prices. The two firms have been at the fund together since 2003 (though results since then are muddied by the picks of M&G, the subadviser that Vanguard let go). Over that time, the fund earned 8.5% annualized, which squeaked past the return of the fund’s bogey, MSCI All-World Country Index Ex USA, by an average of 0.4 percentage point per year.
At last report, three Chinese internet firms were the fund’s biggest holdings: Tencent Holdings (TCEHY), Alibaba (BABA) and Baidu (BIDU).
Expense ratio: 0.40%
Assets: $11.2 billion
One-year return: 1.7%
Three-year annualized total return: 9.8%
Five-year annualized total return: 13.8%
Ten-year annualized total return: 7.3%
Morgan Growth charges low fees, but it is otherwise a middling large-company stock fund. In six of the past 11 calendar years (including so far in 2016), the fund underperformed the S&P 500. Over the past 10 years, it has essentially matched the S&P 500 and the average large-company growth fund. If you have access to one of Vanguard’s index funds, consider Vanguard 500 Index (VFINX) or Vanguard Growth Index (VIGRX) instead.
As with several other Vanguard funds, the problem, at least in part, is too many cooks in the kitchen. The fund has four subadvisers—including Vanguard’s quantitative equity group, which looks at earnings growth, valuation, market sentiment and other factors to choose stocks—and a total of eight managers. We’re not fans of these kinds of arrangements because we think it tends to water down returns rather than boost them.
Assets: $47.4 billion
One-year return: 11.2%
Three-year annualized total return: 12.8%
Five-year annualized total return: 16.7%
Ten-year annualized total return: 9.3%
From Primecap’s debut in 1984, the fund returned 13.4% annualized, handily beating the S&P 500 by an average of 2.4 percentage points per year. Few funds have done better. Primecap is closed to new investors, but if the fund is offered in your employer-sponsored retirement-savings plan, you can ignore that rule.
Primecap Management, the fund’s subadviser, runs this fund the same way as Capital Opportunity. Each of the fund’s five managers independently runs his own slice of the fund’s assets. But they all follow the same approach, focusing on large and midsize companies with strong growth potential that are trading at reasonable prices.
Expense ratio: 0.23%
Assets: $49.9 billion
One-year return: 8.5%
Three-year annualized total return: 6.8%
Five-year annualized total return: 8.3%
Ten-year annualized total return: 7.0%
Conservative investors looking for a no-fuss stock-bond portfolio should consider Wellesley Income. It typically holds 60% to 65% of its assets in bonds and the rest in stocks.
The fund is run by Wellington Management, which also runs Vanguard Wellington, Wellesley’s mirror image. At Wellesley, Michael Reckmeyer mans the stock side and John Keogh steers the bond side. Since the duo teamed up in February 2008, the fund has returned 6.1% annualized, trouncing its peers (balanced funds that typically keep 50% to 70% of their assets in stocks) by an average of 2.9 percentage points per year.
Reckmeyer favors large companies that pay steady dividends. The fund holds 61 stocks, mostly well-known firms, including Microsoft (MSFT), Wells Fargo (WFC) and Johnson & Johnson (JNJ). On the bond side, Keogh has been sticking mostly with investment-grade corporate debt and Treasuries.
Expense ratio: 0.26%
Assets: $92.2 billion
One-year return: 7.2%
Three-year annualized total return: 7.3%
Five-year annualized total return: 10.6%
With its 100th birthday a little more than 12 years away, Wellington is Vanguard’s oldest and biggest actively managed fund. A member of the Kiplinger 25, Wellington invests about two-thirds of its assets in stocks and the rest in bonds.
Wellington Management runs the fund. John Keogh has steered the bond side since 2006; Edward Bousa has picked the stocks since late 2002. Bousa favors dividend stocks. Some are stable companies with steady, above-average payouts, such as Verizon Communications (VZ); he picks up others, such as Royal Dutch Shell (RDS), when they are inexpensive because they are out of favor. On the bond side, Keogh favors government debt, which he says can serve as a “buffer” should the economy head south.
One final note: The fund is open to new investors if it is offered in a 401(k) or other employer-sponsored retirement-savings plan. But outside of these defined-contribution plans, new customers can invest in Wellington only if they buy directly through Vanguard.
Expense ratio: 0.39%
Assets: $17.0 billion
One-year return: 4.1%
Five-year annualized total return: 14.5%
Ten-year annualized total return: 5.5%
Windsor, which launched in 1958, was a solid performer for nearly five decades. But lately, it has been ho-hum. Over the past 10 years, the fund’s 5.5% annualized return slightly outpaced the average for its peer group—funds that invest in undervalued large-company stocks—and slightly lagged its bogey, the Russell 1000 Value index.
On the plus side, Wellington Management, the subadviser behind many reliable actively managed funds at Vanguard, still runs 70% of Windsor’s assets. James Mordy, like many Wellington managers, tilts toward stocks in out-of-favor industries that look inexpensive relative to historical earnings-growth rates. Morningstar analyst Alec Lucas calls Mordy “an opportunistic contrarian.”
The subadviser running the remaining 30% of the fund, Pzena Investment Management, focuses on stocks with price-earnings ratios far below their historical P/Es.
Compared with sibling Windsor II (see the next slide), the original Windsor holds more midsize-company stocks (about one-third of Windsor’s assets, compared with 9% of II’s assets). But the fund’s top 10 holdings are large firms: American International Group (AIG), Citigroup (C) and Medtronic (MDT) make up the top three.
Expense ratio: 0.34%
Assets: $45.7 billion
One-year return: 5.3%
Three-year annualized total return: 7.1%
Five-year annualized total return: 13.2%
Ten-year annualized total return: 5.6%
Like sibling Windsor, Windsor II invests in bargain-priced large-company stocks. But this fund has over twice as much in assets, and close to three times as many managers. And yet, with 11 managers from five subadvisers at the helm, Windsor II can’t manage to outpace its benchmark, the Russell 1000 Value index, which tracks shares of large, undervalued companies. The fund has lagged the index in seven of the past 11 years, including so far in 2016. It’s a sorry picture. Over the past 10 years, Vanguard 500 Index and Vanguard Value Index (VIVAX) would have served you better.
This target-date fund series works like all others: You choose the fund whose name includes the year closest to the time you expect to retire—so a 30-year-old might invest in the 2050 Target Retirement fund—and leave it to the experts to invest your money and shift assets to more-conservative holdings as you grow older. The products in this series use just four Vanguard index funds at their outset: Total Stock Market Index Fund (VTSMX), Total International Stock Index Fund (VGTSX), Total Bond Market Index Fund (VBMFX) and Total International Bond Index Fund (VTIBX). When each target fund gets within five years of the date in its name, Vanguard Short-Term Inflation-Protected Securities joins the mix. The fund tracks an index of U.S. inflation-protected securities that mature in less than five years.
The asset mix in these target funds shifts from 90% stocks and 10% bonds when the fund is 40 years away from the target to a 50-50 stock-bond mix at retirement. The asset allocation continues to change after the fund reaches the target date, eventually settling at 30% stocks and 70% bonds about seven years after the target date. From then on, the mix stays static and is similar to the allocation for Vanguard Target Retirement Income Fund (VTINX), which is designed for investors who are already retired. At that point—again, more than seven years after the fund’s target year—the fund firm may combine your target-date fund’s assets with those of Target Retirement Income Fund.
Vanguard’s target-date funds don’t charge any fees beyond the modest charges of the underlying funds. They’re solid choices for investors who want to put their retirement-savings program on autopilot.
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