[Back to Annex Home]


Fund Name: Vanguard Strategic Small-Cap Equity Fund (VSTCX)

Objective: The fund invests in stocks in the MSCI U.S. Small Cap 1750 index. Those stocks have capitalizations between $77 million and $6.3 billion. It anticipates landing in Morningstar’s “small blend” category. Stock selection is computer-driven and will keep the fund sector- and market-cap neutral with regard to its index. That is, they won’t make “sector bets” and they won’t overweight any particular size company.

Adviser: The Vanguard Group. Vanguard was founded in 1975 by John Bogle. It manages about a trillion dollars in 130 US and 40 non-US mutual funds.

Manager: James Stetler, a Principal in Vanguard’s Quantitative Equity Group, and a Vanguard employee since 1982. Gus Sauter watches from the shadows.

Opening date: April 24, 2006.

Minimum investment: $3000 for both regular and IRA accounts.

Expense ratio: 0.40%

Comments: Strategic Small-Cap Equity is run by the same personnel and software as the recently-closed Strategic Equity (VSEQX) fund. You might anticipate many of the same strengths (low cost, professionalism, discipline) and weaknesses (a relatively tight tie to an index) as Strategic Equity. There are three questions to consider:

(1) Do I want some durn machine picking my small cap stocks? Well, yes, probably you do. The small cap universe is large, volatile and poorly-researched. Relying on machines to sift reams of data and make thousands of comparisons is a sensible way to address those challenges. And many fund shops have successfully done so: Bogle, Bridgeway, and n/i Numeric Investors among them. (2) Do I want Vanguard’s durn machine to be the one? Well, yes, that would be sensible. The model used here has been pretty successful in generating above-average returns (top quartile for its peer group, nearly 14% per year over the past decade) with only average risk for Vanguard Strategic Equity. The difference is that Strategic Equity focuses on mid-caps rather than small caps. But, again, the experience of firms such as Bridgeway and Numeric Investors suggests that the formulae used with mid-caps seems to work about as well with small caps. (3) Do I want to be dumping money into small caps right now? That’s the hardest question. Roy and I seem to agree that the best answer is “that’s a hard question.” Whatever you decide, try not to invest in small caps (or commodities, oil or emerging markets) just because they made money for someone else over the past five years.

Bottom line: For truly long-term investors, Bridgeway’s Ultra-Small Company Market (BRSIX) fund might be a better choice. It has a demonstrated record and Bridgeway’s research suggests that ultra-small will, in the long-term, outperform small. It is volatile and has had a breathtaking run lately (over 25% per year over the past five years). However, for investors looking for relatively mild exposure to larger small caps and smaller mid-caps, BRSIX is likely to offer a good way to beat the index by a point or two a year.

Company link: Vanguard

May 1, 2006