The merger of the two funds, which is expected to be completed in early 2019, will see the combined fund retain the US Growth fund name and continue to invest in US large cap stocks.
Launched in 1968, the 50-year-old Morgan Growth fund is currently co-managed by Vanguard, Wellington Management Company, Frontier Capital Management Company and Jennison Associates. Launched in 1959, the Vanguard US Growth fund is currently subadvised by Baillie Gifford, Wellington Management Company, Jackson Square Partners, Jennison Associates and William Blair Investment Management.
As a result of the planned merger, Frontier Capital Management and William Blair will lose their mandates on the merged fund as Vanguard retains current subadvisors Wellington, Jackson Square Partners, Jennison Associates and Baillie Gifford and add Vanguard Quantitative Equity Group to manage the merged US Growth fund.
Following the merger, the expense ratios for the new fund’s investor and admiral shares are expected to be 0.38% and 0.28%, respectively, which is equal to those of the Morgan Growth fund and lower than the current expense ratios of the US Growth fund.
Daniel Wiener, chairman at Adviser Investments said the merger achieves nothing more than scale for the combined fund, partly because the Morgan Growth fund was ‘a lousy fund’ and ‘overwhelmed by too many managers.’
'Unfortunately, they are not reducing the number of managers on US Growth fund even though they are getting rid of William Blair, they are adding in Vanguard’s quantitative group,’ said Wiener. ‘The only win is that you are moving from a $10 billion to a $25 billion fund. In theory, you ought to be able to bring down the expense ratio a bit, but we are talking basis points.’
Wiener also pointed out that Vanguard did not mention its Diversified Equity fund-of-funds will now have a new composition given that both the Morgan Growth and US Growth are two of the eight funds within the Diversified Equity portfolio, which will now have seven funds as a result of the merger.
In addition, the Valley Forge, Pennsylvania-based asset manager is also trimming the subadvisor line-up on three funds.
On the $5.4 billion Vanguard Global Equity fund, the firm is dropping Acadian Asset Management, which leaves two current subadvisors - Baillie Gifford and Marathon Asset Management to manage the fund.
On the $4.2 billion Vanguard Mid-Cap Growth fund, Vanguard is replacing William Blair with Frontier Capital Management and Wellington while current subadvisor RS Investments Management Co. remains on the fund.
On the $664 million Growth Portfolio of Vanguard Variable Insurance fund, Vanguard is dropping William Blair while retaining current subadvisors Jackson Square and Wellington.
Wiener said the Vanguard Global Equity fund was a fantastic fund when it was first opened in 1995 and originally managed by Marathon Asset Management, but he believes the combination of Marathon and Baillie Gifford will make the fund much much better.
However, adding a third subadvisor to the MidCap Growth fund might potentially ‘harm’ the fund, according to Wiener.
'Every time Vanguard adds an additional manager onto a fund, the performance suffers, so this is a really mixed bag here,’ he added. ‘The biggest winner are shareholders of Global Equity by far.’
Vanguard said the merger and subadvisory reshuffle came as a result of the firm’s ongoing review of its mutual fund and ETF line-up, which has recently led the firm to launch six factor-based ETFs, add Baillie Gifford as a subadvisor to the $588 million million Vanguard Emerging Markets Select Stock fund and rename the $1.5 billion Vanguard Precious Metals and Mining fund as the Vanguard Global Capital Cycles fund.
'We employ a rigorous evaluation process in overseeing our funds and advisors to ensure we provide sound, enduring offerings that meet the long-term needs of our clients,' said Matthew Brancato, who heads Vanguard’s product group.
'We have a long track record of product leadership and making changes that we believe are in the best interests of our clients, including merging funds, changing advisors, modifying mandates, and closing and liquidating funds,’ said Brancato.
Vanguard had $1.3 trillion in active assets and $5.1 trillion in total assets under management as of November 30.