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Vanguard Mid-Cap Growth Fund Investor Shares: A Solid Mid-Cap Growth offering with rock bottoms fees

Approach

Frontier’s approach is best described as growth-at-a-reasonable-price. The team, like Wellington, also invests with a multi-year time horizon, though the end portfolio is more diversified, owning 70 to 80 stocks, while sector bets have stayed within 10 percentage points of the index over the years. Rounding out the subadvisor group is RS, which employs a sector-neutral approach to build a 60-80-stock portfolio. While risk management efforts–such as a desired 2:1 upside/downside ratio for each stock and the use of technical indicators–have proven efficacious on RS’ small-cap offering, they have consistently failed to have the intended impact in the mid-cap arena.

Portfolio

Portfolio’s sector weightings hover fairly close to the Russell Midcap Growth Index’s. As of June 2021, the biggest overweighting was to consumer discretionary, with 19% of assets, more than the Russell Midcap Growth Index’s 16%. The Wellington team purchased hospitality firm Hilton Worldwide Holdings in 2021’s second quarter, believing its asset light business model, good management team, and strong growth prospects in Asia will serve the stock well going forward. Conversely, the end fund held modest underweights to industrials and information technology.

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People

This strategy’s three subadvisors are experienced, stable, and capable, driving a People rating upgrade to Above Average from Average. The group has been more successful in the small-cap space over the years, and the standalone RS Mid Cap Growth offering has struggled since its July 2008 inception. In October 2021, Vanguard slashed RS’ stake to 20% from 45%. Frontier also came on board in December 2018 and manages 40% of fund assets (down from 45%). While the January 2020 retirement of Stephen Knightly was a loss, a thoughtful transition to Chris Scarpa–who had been a comanager since 2010–and the grooming of longtime analyst Ravi Dabas as comanager mitigate concerns.

Performance

The current subadvisors have been in place here together since December 2018. Since then, through October 2021, the fund’s 28.5% annualized gain lagged the Russell Midcap Growth Index’s 31.1% return and 60% of its mid-cap growth. Frontier Mid Cap Growth–the strategy behind Frontier’s sleeve–gained 30.6% annualized gross-of-fees between December 2018 and October 2021, slightly lagging the index but placing in line with peers. While stock selection was strong in financials, it was poor in healthcare, and the underweighting to the solidperforming information technology sector also detracted. 

Wellington–via its Focused Mid Cap Growth strategy–has been the strongest-performing subadvisor but long had had the lowest allocation, though Vanguard raised its stake to 40% of fund assets from 10% in October 2021. Between December 2018 and October 2021, its 31.8% annualized gain gross-of-fees bested 57% of peers. The sleeve benefitted from solid picks in I.T., including DocuSign and Square.

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(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Franklin Income Fund Class C- a solid yield generating fund

The fund seeks to maximize income, while maintaining prospects for capital appreciation, by investing in a diversified portfolio of stocks and bonds. The fund tracks Linked Blended 50% MSCI USA High Dividend Yield Index + 25% Bloomberg High Yield Very Liquid Index + 25% Bloomberg US Aggregate Index

Process:

This fund aims to deliver income and capital appreciation using a flexible, valuation-conscious approach. Management invests in a mix of dividend-paying stocks, bonds, bank loans, convertibles, and equity-linked securities. But a heavy reliance on credit risk and the lack of an identifiable edge warrant a Process rating of Average. Management has significant flexibility to shift the portfolio, relying on bottom-up security selection, and yield in particular, to drive asset allocation without regard to sector weights or credit quality. The portfolio has averaged roughly 40% in equities. Within equities, management gravitates toward large-cap dividend-payers, which often results in big slugs of utilities, materials, and energy stocks. While this approach has consistently produced a relatively high yield and, at times, solid total returns, it has done so by relying heavily on high-yield bonds.

People:

This fund is backed by veterans, but the team doesn’t possess a clear advantage. Its People rating remains Average. Lead manager Edward Perks has helmed this fund since 2002 and Franklin Managed Income FBLAX since 2006. His comanagers possess complementary experience.

The equity and credit analyst teams the managers rely on for ideas boast a wealth of experience, but our confidence in them is muted. And Franklin Equity Income FISEX, an all-stock fund that invests in some of the same dividend-payers as this offering, is backed by the equity analyst team that generates ideas for a broad range of mandates rather than tailored recommendations.

Performance:

This fund’s substantial risks have resulted in high volatility relative to peers and middling risk-adjusted returns. This fund tends to be much more sensitive to equity markets than its typical allocation – 30% to 50% equity category peer because of its hefty dose of credit risk and its often-double-digit combined stake in equity linked notes and convertible bonds.

Price:

The expenses are critical to evaluate as they come directly come out of the expense. The analysts at Morningstar suggest that this share class will not be able to generate positive alpha relative to the benchmark index.

Asset Allocation:

About Fund:

The Fund aims to maximise income while maintaining prospects for capital appreciation by investing primarily in equity securities and long & short-term debt securities. The Fund may invest up to 25% of its net assets in non-U.S. securities. It’s three properties are: a balanced portfolio with exposure to the US markets, best of equity and fixed income teams and attention to risk elements.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.