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The Vanguard active fund giving Fundsmith a run for its money
In the five years since its launch, Vanguard Global Equity (BZ82ZT6) has achieved nearly the same returns as popular funds Fundsmith Equity (B41YBW7) and Lindsell Train Global Equity (B644PG0), and significantly outperformed two well-known global investment trusts, Alliance Trust (ATST) and Witan (WTAN).
Vanguard is best known in the UK for passive tracker funds, yet Vanguard Global Equity is an actively managed fund and proof that the product provider can compete against some of the highest profile funds on the market.
Assets under management for Vanguard Global Equity have significantly picked up in the past 12 months, growing from £100 million to £322 million. ‘It’s taken a while for the penny to drop that we’re strong in active and passive,’ says Andy Surrey, senior national development manager at Vanguard.
The fund portfolio is managed on an equal basis by Baillie Gifford and Wellington. One might ask why bother investing in the Vanguard product when many of Baillie Gifford’s own products are readily available. These include the Baillie Gifford Global Alpha Growth (B61DJ02) which has returned 147% in the past five years versus 119% from the Vanguard fund.
The answer is that Baillie Gifford’s investment style of backing fast-growth technology businesses may not continue to be the outright winner that it has been in recent years.
In fact, Vanguard Global Equity has delivered nearly double the return of Baillie Gifford Global Alpha Growth over the past six months (8.9% versus 4.6% respectively, according to FE Fundinfo). That could be because the former gives investors the best of both worlds – growth and value, whereas the Baillie Gifford fund is mainly growth.
The value investment style has been in favour since November 2020 as the development of Covid vaccines has driven investor confidence that economies can recover rapidly, therefore you no longer need to pay high ratings to access growing companies. You can pay lower prices for businesses which now have better growth prospects due to the vaccine rollout.
Vanguard Global Equity maintains exposure to growth, in case the investment style comes back into fashion thanks to the stocks in its portfolio picked by Baillie Gifford, but it also offers value thanks to the segment of the portfolio run by Wellington.
‘The past five years have been growth orientated, but what you really want is balance,’ says Surrey. ‘That’s why we have blended a value manager and a growth manager (for Vanguard Global Equity) – the best of the best in an enduring fund.’
Surrey adds: ‘We’ve constructed a portfolio where they don’t have to worry about whether it is going to be value or growth (in fashion) this year.
Have exposure to both and let the market do the heavy lifting and let the talent we’ve selected add incremental value on top.’
Fundsmith has returned 131% since the Vanguard fund launched, equating to 12% outperformance across those five years. But Fundsmith has underperformed in the past six months as value returned to favour, returning 5.1% versus 8.9% from Vanguard’s fund.
Six months is a short period in which to judge a fund, but these statistics do illustrate the benefits in the current market of having a blended approach.
You could argue that Fundsmith does take valuation into consideration, given it is part of its motto: ‘Buy good companies, don’t overpay, do nothing’.
However, what it considers to be good value isn’t necessarily what other investors deem to be reasonable, with many stocks in its portfolio trading on high ratings.
Wellington is described by Surrey as being a ‘broad church’ when it comes to the type of stocks it would consider, but he says its selections do provide a value tilt.
Its ‘opportunistic value’ team manage half of the Vanguard fund portfolio. They take the traditional element of the value investment style – identifying deeply mispriced companies with moderate risk expectations – and blend it with strategies designed to exploit inefficiencies in the market, such as those created by behavioural biases.
‘The starting point for our investment is usually others’ endpoint,’ says Wellington portfolio manager David Palmer in a blog entry on Vanguard’s website.
‘You need to find a time when smart people are not making smart decisions, and that is usually when people become emotional, frustrated or disappointed with their results. That is where we come in to engage on the other side.’
Some of the names Wellington has picked for the Vanguard portfolio include Airbus whose earnings have been hit by Covid-related disruption to the aviation industry, real estate investor VICI Properties and Chubb, a property and casualty insurer.
Baillie Gifford’s selection includes technology investor Naspers, Google’s parent company Alphabet and retail giant Amazon.
‘The best tennis players, even when they think they’ve hit an ace, still move into the middle of the court,’ says Surrey. ‘Investors in growth orientated securities in the middle of last year had absolutely hit an ace. But the best investors move back into the middle and create some more balance in their portfolio, sell high and stay in the middle.
‘That is where a lot of our flow has come from; investors thinking “I’m feeling uncomfortable with how well growth has done, so I’m going to move into the middle”.’
DISCLAIMER: The author has a personal investment in Vanguard Global Equity and Fundsmith Equity referenced in this article.