Vanguard Adds Funds From Hottest, Coldest Categories

Index fund giant Vanguard said Thursday it will slap its label on the hot and tech-heavy (TRGEX)Turner Growth Equity fund.

The announcement comes at a time when flows into index funds are slipping, but the move doesn't necessarily mean the anti-fad Vanguard is suddenly chasing hot money.

In fact, Vanguard also announced Thursday that it's launching a value fund, Vanguard U.S. Value. Yes, Janus just raised a stunning $1 billion for its new value fund, but money continues to flow out of the unpopular category, and Vanguard's struggling, $24.3 billion (VWNFX)Windsor II fund in January waved goodbye to more money -- $1.7 billion -- than any other fund in the category, according to Boston fund consultant Financial Research.

Details on the new value fund are sketchy since no paperwork has been filed with the Securities and Exchange Commission . The fund is expected to launch in the second quarter. It follows the firm's familiar pattern of designing a stock fund and hiring a subadvisor, in this case Boston-based money manager Grantham, Mayo, Van Otterloo.

The well-regarded, $221 million Turner Growth Equity story is a bit more intriguing. Next month, the fund's shareholders will receive a proxy asking them to approve the fund's "reorganization." The upshot is that Bob Turner, Mark Turner and John Hammerschmidt will keep managing the fund, but Vanguard will take over its marketing and back-office duties. If shareholders approve, the fund will become the Vanguard Growth Equity fund this summer.

It looks like a good deal all around.

"I think it's a real win-win. Vanguard gets a red-hot manager who looks great in this environment, and Turner gets a powerful brand and distribution channel, which they need," says Burt Greenwald, a Philadelphia-based mutual fund consultant.

Turner, which manages $8 billion among institutional investors and its mutual funds, will almost certainly see the fund get the cash inflows it deserves. Turner hasn't had a hard time selling its micro- and small-cap funds, but the firm hasn't been able to sell Growth Equity, despite good performance.

The fund beats its average large-cap-growth peer over the one-year, three-year and five-year time periods. Its 36.8% average annual return over the past five years beats 92% of its peers, according to Morningstar. Despite that track record, the nearly 8-year-old fund, which had more than half its assets in tech stocks at year-end, is about nine times smaller than the average large-cap growth fund.

Vanguard gets a solid, actively managed large-cap growth fund it has lacked since the (VPMCX)Primecap fund closed to new investors in 1998. More than $10 billion flowed into this category in January alone, according to Boston fund-consultant Financial Research.

And Turner Growth Equity investors? They should probably vote yes to the move since they'll get the same fund and manager with lower annual expenses -- they'll drop from an already low 1% to 0.65%, according to paperwork filed with the SEC. And if the Vanguard association brings in a lot of new cash, that shouldn't be a concern since the fund invests about 85% of its assets in liquid large-cap stocks.

Still, Dan Wiener, editor of the Independent Advisor for Vanguard Investors newsletter, says the new fund is simply a case of the firm "following the money."

Index funds have been passed by more aggressive large-cap growth funds and technology funds over the past year. Nearly 50 cents of every dollar that went into stock mutual funds in January 1999 went to an S&P 500 index fund like (VFINX)Vanguard Index 500. This past January, tech funds took in $9.3 billion, nearly half of the entire industry's net inflows, according to Financial Research.

But Vanguard spokesman John Woerth says the firm currently has $126 billion invested in just 18 actively managed funds and hadn't launched an actively managed equity fund since 1996.

He also says launching a value fund in a growth market is hardly chasing hot money. But Vanguard might have other motivations.

Subadvisers "Grantham, Mayo, Van Otterloo are just a super operation and that puts some heat on the folks that are having such a hard time with Windsor II," says Greenwald.

>To order reprints of this article, click here: Reprints