Vanguard International Growth Fund Investor Shares (VWIGX) is a diversified, multi-manager mutual fund, explains Brian Kelly, mutual fund specialist and editor of MoneyLetter.
Although performance relative to benchmark and peers has struggled thus far this year, the fund remains a category leader when looking at trailing-returns going a year back and beyond.
This solid long-term performance has come during a period that featured a subadvisor reshuffling (in 2016), and in 2022 the fund will face the retirement of a key portfolio manager.
In July 2016, Vanguard decided to remove one of the three subadvisors for the fund. That subadvisor, M&G, managed less than 12% of assets, but it was also the most valuation-conscious of the three. That reallocation of assets to the remaining two subadvisors resulted in the fund becoming even more growth oriented.
Keep in mind that the fund’s mandate is to employ “an aggressive approach that attempts to capitalize on global economic expansion.”
Baillie Gifford Overseas manages 60% of the fund’s assets. That firm uses a bottom-up, stock driven approach to country and asset diversification, looking for companies that have above-average earnings and cash flow growth. At times they will take a venture capital approach with a willingness to take sharp losses to find those exponential winners.
Baillie Gifford has announced that in April 2022 co-manager James Anderson will retire. A succession plan was put in place back in 2019 in preparation for James’ retirement (he is a 40-year veteran). Lawrence Burns was named co-manager in December 2020, joining both James Anderson and Tom Coutts.
We believe that Baillie Gifford was well-prepared for this retirement and while James will be missed, the team remains in good hands.
The remainder of assets (minus a small cash position) is sub advised by Schroder Investment Management North America. Lead portfolio manager Simon Webber oversees a deep international team of global sector specialists who look for reasonably priced companies with strong growth outlooks and maintainable competitive advantages.
Complementing its growth-at-a-reasonable-price (GARP) approach, which generates core holdings to be held for multiple years, the manager will also invest a smaller portion of assets in short-term opportunistic investments that it plans to hold for a year or less. Schroder serves as a good complement to Baillie Gifford in that it does have a more valuation-focused approach.
The fund’s transition to moving further out on the growth spectrum is evident in the P/E ratio of the fund relative to the benchmark (31.4x vs 17.8x as of 5/31/2021).
This is just one of the reasons why the fund’s volatility tends to be higher than its foreign large-growth peers and the benchmark (MSCI ACWI Ex USA Growth Index).
Given the P/E ratio and the higher volatility it is important to note that on a risk-adjusted performance metric this fund features an outstanding track record for compensating investors for the amount of risk taken.
The end portfolio is typically overweight the large cap names relative to the benchmark. When it comes to regional exposure the portfolio tends to overweight the developed nations over emerging markets but the emerging markets weight (primarily China), even if underweight, can still be around a 20% allocation, as it currently is.
Digging deeper into the weeds you see a portfolio that is not afraid to look different than its benchmark. For instance, as of May 31, 2021, the fund was overweight the consumer discretionary sector by over 20% and underweight the financial sector by nearly 10%.
The same can be said when looking at regions and country allocations. Europe is an 11% overweight while the Pacific is almost 13% underweight. The United States is 13.5% overweight (the benchmark has no U.S. exposure) and Canada a 6% underweight. The top ten holdings account for roughly 35% of assets.
What makes the fund’s composition notably different than that of the benchmark is the focus on identifying those emerging long-term trends and then finding the companies that are best suited to capitalize from those trends. Examples of long-term trends include e-commerce and artificial intelligence.
Vanguard International Growth is one way to gain broad-based global exposure (both developed and emerging markets) led by two well-resourced investment firms that use a forward-thinking approach.
Although past performance is no guarantee of future results, the long-term track record of this fund speaks to its ability and success in finding and sticking with the growth leaders of tomorrow.
