Vanguard has made a major management change to one of its biggest funds and also to one of its most adventurous offerings.

The family has replaced manager Dave Fassnacht of the nearly $19 billion in assets Vanguard Windsor VWNDX and almost $500 million Vanguard Capital Value VCVLX with two colleagues of his from subadvisor Wellington Management. James N. Mordy a 25-year veteran member of the Radnor, Pa.-based team that has run the bulk of Windsor since its inception, will take over Windsor (AllianceBernstein remains the other subadvisor). Peter I. Higgins, who's been with Wellington for just three years but has put up attractive numbers at other funds, will take over the eclectic deep-value fund Capital Value.

It's still too early to fully evaluate the changes, but it seems the shift will be more dramatic for Capital Value. Vanguard seems less upset with the strategy Wellington Management has used for decades at Windsor than it is with Fassnacht's execution of it. The fund, which has decent long-term returns, lagged the category and large-value benchmarks during Fassnacht's four-year stint as lead manager. Much of that poor performance has come in the last year, but Vanguard maintains recent performance was not the catalyst for the change. Rather they said it was the result of an ongoing dialog among Vanguard, Wellington and the fund's board.

If they thought the fund needed to make drastic course corrections, though, they made an unusual choice. Mordy is the back-to-the-future candidate. He has been part of the team assigned to Windsor eight years longer than Fassnacht has been at Wellington, and has worked with its most successful managers, including John Neff and Charles Freeman. There are always some changes when a new manager arrives, but I don't think they'll be too dramatic at Windsor. It remains to be seen whether Mordy will fair better than Fassnacht.

Capital Value is another story. Peter Higgins, who used to work for the Boston Company and put up impressive numbers at Dreyfus Premier Midcap Value DMCVX from 1995 to 2005 (16.4% annualized versus 11.6% for the mid-blend category), works on Wellington’s Boston-based capital appreciation team. He’s value-oriented, but not a deep value contrarian like the Radnor-based Fassnacht was. Dan Newhall, a principal with Vanguard's portfolio review group that hires and monitors subadvisors, described Higgins to me as "a value guy, but maybe a bit more opportunistic." Higgins, who also has co-managed Hartford Stock Fund IHSTX for the last three years, likes cheap stocks, but also will consider stocks with accelerating earnings growth and will hang on to picks longer if their fundamentals are moving in the right direction, Newhall said. That jibes with our take on Higgins' style. When we wrote about his departure from Boston Company and Dreyfus Premier Midcap, we noted that he had a penchant for dipping into growth sectors often ignored by other value investors.

What it means for the fund long-term is harder to say. I liked Fassnacht's benchmark agnostic style and am on record saying his wide-ranging, eclectic, and contrarian style was an acquired taste, but one worth acquiring. I would have preferred Vanguard gave Fassnacht a chance because his was an approach that I bought into (Literally. I invested in Capital Value earlier this year.) But the early indication is that Higgins is not a slave to a benchmark either. His previous experience and success at least deserve a closer look.

Bottom line: Both Windsor and Capital Value are on probation. Do you think they deserve it?

Dan Culloton
Senior Mutual Fund Analyst
Editor Vanguard Fund Family Report

Haven't followed Windsor, but Capital Value has been a dog for quite a while, so I'd consider it dead and buried until some new manager pulls it out of the grave. At least Vanguard has recognized it as a failing fund, well before Morningstar I might add, which has continued to sing its praises in analyst reports to this day.

I got the feeling Fassnacht might not know what he was doing when M* reported that his position in a salmon farming company was a great idea because of the movement toward healthy eating. Of course anyone who knows anything about salmon farms knows that they create the most unhealthy fish you could possibly eat, loaded with dyes and pesticides and antibiotics.  

I bought Capital Value in 2002, in the depths of a bear market. In early June of this year I finally gave up and took a small loss.  In fairness to Fassnacht, I have seen some other value funds also fail badly over the past year or so.

I will be the first to admit that I have not covered myself in glory in my analysis of this fund. I underestimated it feast or famine nature. Up until the middle of last year it was ahead of the category with a more than 9% gain. A $10,000 investment made in Capital Value on Jan. 1, 2002, would have grown to $16,217, while a the same investment in the S&P 500 would have grown to $14,443, and the same deposit in the typical large value fund would have grown to $15,749. Most of the poor performance has come since June of last year when the credit crisis hit. I think you can still make a case for Fassnacht's aggressive value style for risk-tolerant long-term investors, though.

I'd point out also that Fassnacht's thesis for Marine Harvest, the Norwegian Salmon fishery, had less to do with healthy eating habits than with rising prices for grain fed sources of protein, such as beef, that would increase demand for seafood. Fassnacht argued that Marine Harvest's had a dominant position in the global seafood industry that positioned well to take advantage of a supply/demand imbalance for seafood. It hasn't been a great pick so far and I'd be surprised if Higgins keeps it in the portfolio, but the argument for it wasn't based on fickle eating habits alone. 

Dan Culloton 

 

Windsor has lagged the S&P by 10% (approx -22% vs -12%) over past year and has only outperformed S&P over past ten years by 1+%, so I can see why they got rid of portfolio manager.  Wellington is good firm, but with new, experienced portfolio manager you should put it on watch list and look for other active large value alternatives if you can find one your comfortable with from a risk/return standpoint or just index it.

The big problem for Capital Value is some genius in it decided that Airlines are a value stock and bought Northwest Air as their 8th largest holding.

 I bought in in 2006, still planning on giving them some time, but frankly I think the management here needed a kick to the tail for not anticipating how increased energy prices trickle down to everything else.
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Dan, thanks for your reply about Marine Harvest. I looked back in the archive of fund analyst reports and saw that the 8-15-07 report for VCVLX referred to "healthier" alternatives to grain-fed meat; maybe I read too much into that single word in the report. All the same, salmon farms have been getting bad press for several years for producing crummy food, wasting fish protein on feed, and hitting wild fish stocks hard with diseases incubated in the feed-lot conditions of the typical fish farm. So, I still have to say stock picking at VCVLX was far below par for some time, especially considering the airline bets; UAL was also a top holding for a while. (That said, I'll be watching the fund under new management because I like the general investment thesis, that is, if there's somebody who can make it work.)

Yikes. Just looked at the Hartford fund that new VCVLX honcho Higgins co-manages now, and am not impressed. Predictable industry-giant-heavy portfolio, very high expenses, two stars for performance. Let's hope Higgins is better and more creative than his current fund.

I have small positions in both funds and will stay with them to see how the new managers play out. Re: Capital Value, since I owned DMCVX when Higgins ran it and was happy with performance then, I'm happy to give him a chance at Capital Value. My memory was you had to be prepared to ride out volatility, but the long term ride was fine.

Stan Cox

In for a penny, in for a pound with VCVLX.  Buying a small position on July 1, 2007, it's been downhill fast ever since.  It probably will get worse before it gets better.   After it dropped from $14 to $8, however, I dollar-cost-averaged for more. I am grateful for a new set of eyes on our $1/2 billion. Let's see what Higgins can do.  Buy and hold means buy and hold.  Value investing isn't for sissies. Probation? C'mon, man.

I'm not a boglehead.  I invest in Vanguard funds because my 403b gives me no choice.  I would prefer Third Avenue, Longleaf Partners, Artisan, and Matthews.  When I think about Vanguard funds, I think about how similar they are to the funds I really want to buy, funds from Third Avenue, Longleaf Partners, Artisan, and Matthews.

For an investor like me, Vanguard is a wasteland.  (1) VASVX has the philosophy I want, but its performance is disappointing.  (2) All of Vanguard's managed foreign funds are too focused on Europe.  I prefer TAVIX's focus on the Pacific countries.  Where is Vanguard's version of MACSX or PRASX?  (3) I don't like Vanguard's habit of building a fund of funds.  VHGEX has what I want, mixed in with a lot I don't want.  There are several other examples.  I don't buy any of them.         

For a long time I've been wondering when Vanguard was going to change the management of Capital Value.  Now the change has been announced, and I don't know whether to be happy or not.  Is the new manager similar to the managers I admire from Third Avenue?  Or Longleaf Partners?  Or Artisan?  Or Fairholme?