Morningstar - Q2 2022 - 47

EXHIBIT 3
Learning From the Past Vanguard's new Advice Select funds better align with the firm's values than its Horizon offerings
in the mid-1990s.
Name
Vanguard Advice Select
Dividend Growth VADGX
Vanguard Advice Select
Global Value VAGVX
Vanguard Advice Select
International Growth VAIGX
Inception Date
Subadvisor
11/9/21 Wellington Management
11/9/21 Wellington Management
11/9/21
Sources: Morningstar Direct and Vanguard. Data as of 12/31/2021.
Baillie Gifford
Manager Name
Donald J. Kilbride
David W. Palmer
James K. Anderson;
Lawrence Burns
Number
of Stocks
27
101
25
Prospectus Net
Expense Ratio %
0.45
0.40
0.42
Morningstar
Fee Level
Low
Low
Low
Morningstar Fee
Level Group
Median %
0.82
0.98
0.97
bought in at the top should the private equity
market implode and struggle for years.
Private equity's costs and complexity are an
obstacle, and capacity constraints limit its
democratization potential. Although Vanguard
envisions potentially allocating a portion
of target-date assets to private equity someday,
it and other major target-date providers have
yet to take that step. But with Vanguard's
own tepid 10-year return expectations for publicly
traded equities, it makes sense to look toward
a sibling asset class whose returns might
not move in lockstep with the public market
and begin offering exposure to qualified
clients. It would also be irresponsible not to
explore broadening opportunities given
that private companies can grow justifiably large
before turning public, as did Meta Platforms
FB (formerly Facebook).
High-Conviction Active
Vanguard's three newly minted Advice Select
funds resemble the 1995 debut of four highconviction
active Horizon funds on Bogle's watch.
Although he later felt he was wearing a marketing
hat more than a fiduciary hat in launching
aggressive funds that investors might struggle
to use well even if the funds succeeded,
he pointed with pride to the record of Vanguard
Capital Opportunity VHCAX, one of the original
Horizon funds. It has thrived over market
cycles since Vanguard fired the fund's original
manager and turned it over in 1998 to a subadvisor
it by then knew well, Primecap.10
Vanguard took this Primecap lesson to heart.
Although new, each Advice Select strategy builds
on either an existing or prior Vanguard offering
and uses proven investors from two of
Vanguard's most trusted subadvisors, Wellington
and Baillie Gifford (EXHIBIT 3 ).
The Advice Select funds differ in their exclusivity
but otherwise align with key Vanguard values.
Reserving them for advisory clients helps keep
capacity in check and increases the chances they
will be used well, as investors must submit
to a risk assessment before they get in. And, if
tempted to get out after poor performance, clients
must speak with an advisor first.
The Advice Select funds are affordable. Including
the 0.3% annual advisory charge, each still costs
less than its peer median.
Finally, despite its passive success, Vanguard
has remained committed to active management
and has even tolerated highly differentiated
portfolios from its most skilled investors. The
10 Bogle, Character Counts, P. 176. Bogle, Stay the Course, PP. 104-105, 200-201, 217.
11 In March 1998, 38.4% of Bogle's personal $35.2 million portfolio was in index funds; the rest was active, including his biggest single holding: a $4.6 million stake in the stock strategy Vanguard
Windsor. See Gould, C. 1998. " An Unusual Window Into Vanguard. " The New York Times, May 31.
morningstar.com/products/magazine
47
Advice Select portfolios are also akin to Vanguard
Windsor VWNDX when John Neff ran it from
1964 to 1995.
In Neff's last decade, Vanguard Windsor held as
few as 50 stocks, and its typical materials
sector overweighting reached 20 percentage
points compared with the S&P 500. Granted,
it underperformed in those 10 years, but its results
over Neff's tenure were outstanding. Bogle
himself seems to have benefited, as regulatory
filings showed Vanguard Windsor was his
biggest personal fund holding more than two
years after Neff stepped down.11
Ideals Intact
No organization is perfect, and that's certainly
true of Vanguard. However, the competitive
spirit and ideals of its founder, who became the
industry's conscience, remain more in place
than not. K
Alec Lucas, Ph.D, is a manager research strategist at
Morningstar Research Services LLC.

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