Successful Vanguard fund to get new management

October 06, 1991|By Carole Gould | Carole Gould,New York Times News Service r

One of the largest stock funds in the United States has announced a plan to bring in new managers for part of its portfolio, and in light of the fund's excellent record, it is worth asking whether holders should be worried about the changes.

The $3.2 billion Vanguard Windsor II Fund -- the 13th largest of the nation's 1,000-plus stock funds -- has been managed by Barrow, Hanley, Mewhinney & Strauss, a firm that handles roughly three-quarters of the fund's assets, and Invesco Capital Management.

But Invesco recently acquired the Financial Funds Group in Denver, which competes with Vanguard, and is now marketing the funds under its own name. Because of that, John C. Bogle, Vanguard's chairman, and Invesco have agreed to part ways to avoid conflicts of interest.

Windsor II shareholders will vote on a proposal to replace Invesco at a meeting set for Oct. 22; if approved, the new management will take over Nov. 1.

The upheaval at Windsor II "makes me a little wary," said Dan Wiener, editor of the Vanguard Adviser, an independent investment newsletter based in Brooklyn, N.Y.

Vanguard began Windsor II in June 1985 after it closed Windsor to new investors because cash was flowing into the fund more quickly than it could be carefully invested. Windsor, the industry's second-largest fund, is managed by John B. Neff, one of the most prominent of all mutual-fund managers. Yet Windsor II has outpaced its big brother.

Both are "value" funds, which buy out-of-favor stocks with low price-earnings ratios. But Windsor II is more diversified than Mr. Neff's fund. Mr. Neff makes big bets with his $7.9 billion fund, which holds an average of only 70 to 80 stocks. Windsor II, whose assets are much smaller, holds roughly the same number of stocks, but its holdings are distributed over more industries.

Too much diversity can backfire in stock funds. When a fund owns too many stocks, its performance tracks the average of the market as a whole. Yet Vanguard wants to replace one manager -- Invesco -- with three, and it seems reasonable to ask whether more managers mean even more diversity.

Mr. Bogle insists that Windsor II investors will see "no change in the nature or direction" of the fund's portfolio. He says Invesco's share is being divided among three managers, selected from 20, to position the fund for growth.

Two companies will each handle about $270 million, roughly 9 percent of the fund's portfolio. Equinox Capital Management uses a blend of quantitative and fundamental analysis to identify medium- and large-capitalization stocks. Tukman Capital Management specializes in concentrated portfolios of well-managed companies in growing businesses.

The remaining $200 million or so will be handled by Vanguard's Core Management Group, a unit of the company that manages the $5.1 billion in Vanguard's seven index funds. Its Windsor II stake will be entirely managed on a quantitative basis, meaning that stocks are selected from a group of 250 stocks with below-average price-earnings ratios, above-average yields and other criteria.

Right now, Invesco manages about half of Windsor II's 80 stocks. Of the new managers, Tukman will manage 10 or 15 stocks, and Equinox will manage 25 or so.

Mr. Bogle said the Core Management Group would select an additional 40 or so, for a total of roughly 80 stocks.

After accounting for overlap with the Barrow, Hanley portfolio, the new management arrangement is expected to add roughly 20 stocks to the fund's total portfolio.

What's an investor to do? John Rekenthaler of Morningstar Inc., a mutual-fund rating concern, says that because Windsor II "is not extremely idiosyncratic, it's easier to pull out one manager and plug in another." He calls it a "good fund with competitive returns and below-average risk."

Mr. Wiener of Vanguard Adviser recommends that investors hold their shares of Windsor II, but he is worried about the possibility that the number of issues held by the fund may increase sharply. If the number of shares approaches 125, he said, "I would start to get nervous."

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