The Vanguard Group Inc.'s “delayed response” in firing AllianceBernstein LP as the subadviser of its U.S. Growth Fund Ticker:(VWUSX) “may be the worst case of fund stewardship ever seen at Vanguard,” according to Dan Wiener, editor of Independent Adviser for Vanguard Investors, a newsletter.
In a newsletter article published today, Mr. Wiener questioned why it took Vanguard so long to fire Alliance. But the article also posed questions about why the firm didn't disclose that when it switched portfolio managers within AllianceBernstein in 2008, it resulted in a change in investment strategy.
Over its nine year relationship, which ended in October, Vanguard made a few changes to the management of the U.S. Growth Fund. In 2004, the firm added William Blair & Co. LLC to manage part of the fund alongside Alliance. In July 2008, James G. Reilly, an executive vice president at Alliance, and Scott Wallace, a senior vice president, took over portfolio management duties from Alan E. Levi, who had been managing the fund since 2002 and retired.
However, when the fund changed managers, it also changed strategies from “disciplined growth” to “U.S. strategic growth,” according to Mr. Wiener. “Despite the fact that the strategy AllianceBernstein used for managing U.S. Growth's assets was changed, Vanguard did not communicate this to shareholders,” Mr. Wiener wrote.
Vanguard disputes that there was any change of strategy in the fund.
“The fund was and remains one that invests primarily in large-capitalization stocks of U.S. companies considered to have above-average earnings growth potential and reasonable stock prices in comparison with expected earnings,” John Woerth, a spokesman at Vanguard, wrote in an e-mail to
InvestmentNews. “Yes, there were some changes in the portfolio's composition (individual stocks and sector weightings) resulting from the transition, as would be expected. However, the fundamental characteristics of the fund remained largely unchanged.”
In his article, Mr. Wiener questioned why it took so long for Vanguard to fire Alliance after years of underperformance. The U.S. Growth Fund has underperformed its category for the past one-, three-, five-, 10- and 15-year periods, according to Morningstar Inc.
“Where were Vanguard's directors?” Mr. Wiener wrote.
Vanguard made many changes to the management of the fund over the years, Mr. Woerth wrote in an e-mail. “Most notably, William Blair was added as a co-advisor in 2004 and the Alliance team was re-constituted in 2008,” he wrote. “As such, Vanguard has taken steps in the interim and it is misleading to suggest otherwise.
On Oct. 10, Vanguard announced that it had tapped Delaware Investments and Wellington Management Co. LLP to replace Alliance. Each manager, along with William Blair, manages one third of the portfolio independently.
