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Fund Times

Fund Times: Two Vanguard Funds Close

Plus, Janus manager steps down, and wise words from Third Avenue Value.

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Effectively immediately, Vanguard has closed  Vanguard Explorer (VEXPX) and  Vanguard Precious Metals and Mining (VGPMX) to new investors. Over the past few years the funds have enjoyed tremendous growth (Explorer now tops $12 billion in small-cap growth stocks, and Precious Metals is up to $3.3 billion), and this step was viewed as necessary in an effort to temper asset flows. Existing shareholders are limited now to $25,000 annual investments.

New Vanguard Fund
Vanguard is adding another quant-driven fund to its lineup. Vanguard Strategic Small-Cap Equity will be managed by James Stetler of Vanguard’s quantitative equity group, which has posted good results at  Vanguard Strategic Equity (VSEQX) and  Vanguard Equity-Income (VEIPX). The management team will use computer models to select small-cap U.S. stocks that balance between various value and growth prospects. In typical Vanguard fashion, the expense ratio clocks in at a low 0.40%, which undercuts its typical no-load small-cap rival's 1.25% expense ratio.

Various Vanguard Manager Changes
Donald Kilbride is replacing Minerva Butler as manager of  Vanguard Dividend Growth (VDIGX). The fund trailed the large-value category since it changed its mandate from a utilities-only fund at the end of 2002. However, it has done better than similar competing funds, such as  Fidelity Dividend Growth (FDGFX) and  T. Rowe Price Dividend Growth (PRDGX). Kilbride has over 10 years of investment experience at Wellington.

Also, James Troyer is now listed as the day-to-day manager of Vanguard Strategic Equity after taking over for Joel Dickson. This change is driven by the SEC requirement that the day-to-day manager be listed on the prospectus. Troyer has worked closely with Dickson for some time and has shared day-to-day management duties. Dickson and Gus Sauter will also be listed in the prospectus as providing oversight.
And finally,  Vanguard Mid Cap Growth (VMGRX) is getting a new subadvisor, Chartwell Investment Partners, which also runs a slice of  Vanguard Explorer (VEXPX). Chartwell will join existing subadvisor Provident Investment Counsel and manage about half of the fund's assets.

Vanguard Approves Another Raise
Vanguard has negotiated a new management fee structure with Vanguard Precious Metals and Mining subadvisor M&G Investment Management. The new fee arrangement revises breakpoints that benefited M&G, but also includes a performance adjustment. Previously, the fee was not adjusted for the performance of the fund.

M&G will be paid 0.30% on the first $200 million in assets, and then 0.20% for assets above $300 million, 0.15% for assets above $500 million, and finally 0.10% for assets above $1 billion. Previously, it took just $500 million or more to reach the breakpoint of 0.10%.

While we never like to see management fees rising, we take some solace in the fact that the expense ratio on the fund is actually going down from 0.48% to 0.45% thanks to a growing asset base. Moreover, we like performance fees in general, so even though it may actually raise fees in the future, it better aligns the subadvisor's interests with the fund's success.

Janus Global Technology Leader Steps Down
This week Janus announced that Mike Lu, portfolio manager of  Janus Global Technology (JAGTX), would be leaving the firm. Instead of naming a new portfolio manager, Janus is handing control of the fund to its seven-person technology analyst team, with Brad Slingerlend and Barney Wilson being named coheads of that group. Slingerlend joined Janus in 2000 as an analyst. Wilson joined Janus in January 2005, but he has more than 10 years experience as an equity analyst for Lincoln Equity Management, American Century, and Putnam Investments.

Lu had managed Global Tech since its 1998 inception, and stormed out of the gates with a 212% return in 1999. The fund lost all that ground and then some during the ensuing bear market, and it has posted generally middling returns since then, though the fund perked up in 2005.
Third Avenue Value's Words of Wisdom
Besides taking three of the most famous economists to task for missing the trees while commenting on the forest, the new quarterly shareholder report for  Third Avenue Value (TAVFX) is chock-full of good information. On Page 4 portfolio manager Marty Whitman mentions two industries that are not subject to meaningful price competition: investment banking and money management. That's nothing new to us, but its nice to have someone (especially a manager) making the same point.

When we interviewed Whitman for an update on Third Avenue Value, he was slightly taken aback when asked about Paul Roye (the former head of the SEC’s division of investment management) and his recent statements on the universal fees and funds competing on price. He thought it so clear and obvious that there was no price competition (he did allow a qualification for money markets and index funds). Whitman said investors don't care what managers such as Bill Miller cost, and that money managers compete a lot more on performance and service than price.

On an unrelated note, as of March 1, 2006, the fund's minimum investment will increase to $10,000 for a regular account, and $2,500 for IRAs.

Dieter Bardy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.