The top three sectors for this three-star-rated fund are Technology, 30.58% of assets; Healthcare, 17.41%; and Consumer Cyclical, 16.55%.
Vanguard Mid-Cap Growth Fund Investor Shares (VMGRX)
From Moneyletter
Buy Vanguard Mid-Cap Growth Fund Investor (VMGRX). The fund is run using a multimanager approach, with all three of its advisors employing a fundamental, bottom-up approach to select stocks with outstanding managements and potential for growth. Each manager independently manages a portion of fund assets.
Vanguard has used a multimanager approach in various funds since 1987, in cases where the firm believes that a combination of different but complementary managers will lessen portfolio volatility and provide the potential for superior long-term performance.
In mid-December, Vanguard altered the management structure of the Mid-Cap Growth fund from two subadvisors to three. The announcement was made in conjunction with the merger of Vanguard Morgan Growth into Vanguard U.S Growth. With that merger (effective in April), Vanguard shuffled its advisory team, removing William Blair Investment Management.
RS Investments, already a manager for Mid-Cap Growth, remained with the fund. Vanguard added two new managers: Frontier Capital Management, a long-term subadvisor to Vanguard, and a growth equity team from Wellington Management.
Here, a look at the three strategies. RS Investments (manages 50% of fund assets). On board since the end of 2016, RS Investments combines quantitative screening with fundamental analysis to find stocks capable of sustainable earnings growth. The quantitative model starts with 60 factors analyzing growth, quality, valuation, and sentiment. The managers then examine
fundamental factors to determine if a company can maintain sustainable growth. Finally, the team uses scenario analysis to set upside and downside target prices, with only stocks with a better than 2:1 upside-to-downside ratio making the cut.
Wellington Management (responsible for 45% of assets). This advisor uses traditional bottom-up methods of stock picking—fundamental research and analysis—to find companies with perceived above-average growth prospects. The team focuses on sustainable earnings power. Through analysis of return on investment capital forecasts, price-to-sales ratios, and risk factors, it develops bottom-up price valuations for stocks. It tends to take larger positions in established growth stocks and smaller stakes in emerging names. Compared to the other managers, its portfolio sleeve tends to feature higher growth but also higher valuations.
Frontier Capital Management (manages 5% of assets). Frontier also focuses on stock picking via bottom-up fundamental research. It targets companies with above average growth prospects, good business models, sound management, and competitive advantages that will allow for superior rates of return on capital over a business cycle. The managers emphasize company and supplier visits, and consider secular industry trends. They also consider relative price-earnings ratios, and have a longer-term time horizon of three-to-five years. The approach aims to balance growth with reasonable valuation.
Looking at the fund’s sector distribution, it differs only slightly from the Russell Midcap Growth Index benchmark. The portfolio is well diversified with about 150 holdings, and only 16% of assets in the top ten issues.
Good performers this year through the end of June include many of its top ten holdings. Global Payments, a leading provider of payment processing and software solutions that focuses on serving small- and mid-size merchants, recently announced a merger with Total System Services.
Its stock has advanced 54% this year. ServiceNow, up 54%, provides software solutions to structure and automate various business processes. It commands a high market share and has grown rapidly.
Vanguard Mid-Cap Growth Fund Investor generally has been a strong performer in its category over the years. This year, the fund’s 27.7% return through June 28 landed it in the top 70% of the Morningstar mid-cap growth category.
Brian W. Kelly, Moneyletter, www.moneyletter.com, 800-890-9670, July 2019