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March 04, 2004

Vanguard closes two equity funds

The Vanguard Group has closed Vanguard PRIMECAP Fund and Vanguard Capital Opportunity Fund to new shareholders, effective immediately. The funds' existing shareholders may make additional purchases of up to $25,000 annually.

Vanguard decided to close the two funds after consulting with the funds' investment advisor, PRIMECAP Management Company of Pasadena, California. PRIMECAP has managed the $23 billion PRIMECAP Fund since its inception in 1984 and the $7 billion Capital Opportunity Fund since 1998. PRIMECAP Fund, which is Vanguard's second-largest actively managed equity fund, and the Capital Opportunity Fund were among Vanguard's top performers in 2003, posting total returns of 36% and 48%, respectively.*

"While the funds' asset levels and cash flows are currently manageable, the likelihood for rising cash flows is clearly high, given the funds' strong performance," said Vanguard Chairman John J. Brennan. "Our responsibility lies with the funds' current clients, so we are taking these steps to preserve PRIMECAP Management's ability to employ its distinct investment strategy and pursue competitive long-term returns going forward."

Originally posted in thread: 33614

...has never allowed adding funds to an existing account that is closed.

Paul

Originally posted in thread: 33614

I meant "never allowed adding new funds to an existing account in a closed fund."

Paul

Originally posted in thread: 33614

....in some plans may also be able to continue to invest in these two funds in accordance with the terms of their plans.

Regards,

Mel

Originally posted in thread: 33614

Good for the VHCOX [Capital Opportunity] team. We have a winner in this fund - one of my core holdings.

CFS

Originally posted in thread: 33614

I exchanged both my VPMCX and VHCOX holdings into VTSMX just in the last two weeks. They've had a great run and I like their management style, but it was in my taxable acct and I decided to just index and build up unrealized cap gains for the next few decades. I haven't worked up the courage to sell VGHCX in that acct yet; I think there are some undervalued pharmas in its port that stand a good chance of outperforming this year. I also own MRK and PFE in my brokerage account...not very Diehard, true, but they've been good to me so far.

I was getting very nervous towards the end about VHCOX letting their RIMM holdings skyrocket. The risk of such a big single tech holding is NOT accurately reflected in M*'s rating as far as I am concerned.

Craig B.

Originally posted in thread: 33614

Over the last 10 years, Primecap has an annualized pre-tax return of 15.30%, and an after tax return of 14.17%.

Over the last 10 years, TSM has an annualized pre-tax return of 10.80%, and an after tax return of 9.99%.

Often, I think the focus on tax efficiency is a good example of the tail wagging the dog.

Petrocelli

Originally posted in thread: 33614

Petrocelli,

Your point is quite true, but the salient issue is future performance. After all, Fidelity Magellan posted superb numbers under Lynch that it couldn't back up under his successors. Magellan had its share of loyalists who figured the good times would last forever.

The Primecap team has been doing the same thing, very successfully, for 20 years. That is an eternity in the fund business. Maybe they will go on for twenty more, but if they don't I didn't want to be in the position of having to pay big taxes to redeploy my money to earn a better return.

It is the paradox of actively managed funds that by the time a manager has demonstrated the ability to beat the market over the very long term (I define this as 30+ years), they're ready to retire and render the record of historical interest only. I'm aware that I am settling for second place to somebody. My take is that I am not smart or clairvoyant enough to accurately pick the first place winner, whether Primecap or anyone else.

Regards,
Craig B.

Originally posted in thread: 33614

You don't have to pick the first place winner. You just want to pick a low cost, actively managed fund with low turnover -- like Primecap. The great thing about it is that when it underperforms the index, it does so by a few points. When it beats the index, it really clobbers it.

I realize I am in a minority, but I often think this forum does a disservice by taking really sensible investors who have invested successfully in the past and convincing them to invest in TSM. You are told that the only reason you picked those two winners is because you were lucky. I just can't beleive that I was lucky when I invested in Primecap, or Capital Opportunity, or Healthcare, or Explorer, or Windsor II. By the same token, I don't believe I am that smart. Maybe picking winners isn't that hard if those funds are low cost, actively managed funds, and they are run by a great company like Vanguard.

Petrocelli

Originally posted in thread: 33614

I have been winding out of Capital Opportunity over late January and February. I still keep a significant amount so that I remain a "current investor", but more than 50% is gone. PRIMECAP is the only growth shop that I hold with the highest respect (the others are primarily value shops, like Dodge & Cox or Longleaf). But this fund closing is the epitome of a perfect sell signal for a contrarian-minded investor.

Originally posted in thread: 33614

I would never buy or sell a fund based on whether it is opening or closing. However, I tend to agree that much of the new money which flowed in to these funds and other (as seen by the record inflows last month), indicate that the market is overbought.

I recently sold all my shares in American Advantage Small Value. I had made over 100% profit in a few years in that fund, and decided it was time to sell. (I bought shares in PIMCO Commodities and Merger Fund with the proceeds. Ironically, Merger Fund closed a few days after I purchased it.)

Note, however, that the three year average returns of both Primecap and Cap. Opp. are still not shockingly high. Compare it to REIT Index, or small value.

I view Primecap and Cap. Opp. as the core of my portfolio. I have made a great deal of money in both funds and will sell other funds to trim my equity exposure.

Petrocelli

Originally posted in thread: 33614