Vanguard, which has pioneered low-cost funds that passively track the stock market, plans to launch three new actively managed funds later this year, but they will be available only to customers of the company’s adviser service, which charges a 0.30% annual fee.
The funds — Advice Select Dividend Growth, Advice Select International Growth and Advice Select Global Value — will be offered to clients of Vanguard’s hybrid robo-adviser, the Personal Advisor Service.
Vanguard, which has a founding reputation for low-cost index funds, already has standout actively managed mutual funds.
And while Vanguard’s advisory service has grown, it remains small, just $240 billion in assets out of Vanguard’s $8 trillion total.
Clients of the adviser service have previously leaned on Vanguard’s “total market” index to build plain-vanilla portfolios.
With the latest move, Vanguard acknowledges that “active management matters, but that concentrated active portfolios can help add value to your portfolio,” said Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter, which is independent of the company.
Advice Select Dividend Growth, run by Wellington’s portfolio manager Don Kilbride, will be a version of the existing Vanguard Dividend Growth fund, a portfolio of about 40 stocks. Vanguard temporarily closed Dividend Growth to new investors in 2016 when it reached about $30 billion in assets. It reopened the fund to investors in August 2019. Today, the fund has more than $50 billion and is open to anyone with a minimum $3,000 to invest.
For the adviser-service-only Advice Select fund, Kilbride will run an even more concentrated portfolio — and it will cost investors nearly double, with an expense ratio of 0.45% versus 0.26% for the Dividend Growth fund that he has managed for the past decade and a half.
“Pile that atop the annual fee of 0.30% for PAS [the advisory service] and it starts to add up,” said Wiener, for a total fee of 0.75% annually. But that’s still relatively cheap for an actively managed fund with its track record, he added.
The Scotland-based investment firm Baillie Gifford will manage Advice Select International Growth. As with Advice Select Dividend Growth, International Growth will be more concentrated and more expensive than its sibling fund. David Palmer, manager of Advice Select Global Value, will be the manager.
“It’s refreshing to see Vanguard putting more stock in its under-publicized active management talent,” Wiener said. “But we’re stymied as to why it wouldn’t use the existing Dividend Growth and International Growth funds. Why launch concentrated versions of the first two funds and then keep them restricted to a limited pool of investors? And if those distilled versions are truly better, why not make them available to everyone, even if they cost more?”
Separately, Vanguard’s acquisition of direct indexing shop Just Invest could be a way to offer custom index funds. Other firms such as BlackRock, Schwab, and Parametric also offer so-called direct indexing, said Herb Blank, a senior quantitative analyst at Value Engine Inc. and senior consultant at Global Finesse LLC.
Instead of a plain-vanilla index, customers of direct indexing can add or delete certain holdings according to their beliefs or values, such as screening out companies that sell weapons or tobacco, that donate to certain political causes, or that fail to support environmental, social and governance issues.
“Direct indexing helps investors express their very different values,” Blank said. “Investors now are moving toward this concept.”
Currently, individuals rely on mutual funds and exchange-traded funds that offer a way to express their beliefs in the markets. The growth in ESG funds — environmental, social and governance oriented — is just one example.
This growing focus on high-profile, public interest issues, such as executive pay, has also led to a rise in campaigns launched against Corporate America from multiple activists.
A relative newcomer to the activist space is American Conservative Values ETF (NYSE: ACVF) which began trading in October 2020, and charges investors 0.75% annually. Most recently, the fund divested its holdings and initiated a boycott of Bank of America Corp., Lowe’s Co., American Express Co. and Nasdaq, Inc. as part of a periodic portfolio reconstitution based on its view of conservative political values.
Lowe’s, Bank of America, and American Express “have embraced and begun teaching their employees critical race theory,” said the portfolio manager Tom Carter, an educational philosophy that “insists that certain Americans will always be oppressors, while others can never rise above an oppressed status and will forever remain victims….