VALLEY FORGE, Pa. - In the two years since The Vanguard Group changed the subadviser of its Trustees' Equity U.S. mutual fund from Batterymarch Financial Management, Boston, to Geewax, Terker & Co., Phoenixville, Pa., performance has been uneven but asset growth is rebounding.
Assets jumped to $130 million as of March 31 from $76 million the prior year.
The much larger Vanguard Trustees Equity-International fund, which has been managed by Batterymarch since 1983, also experienced a jump in assets to $1.1 billion as of March 31 from $727 million a year earlier, but most of the growth was from investment performance.
Although the funds are rated below average to middle-of-the road by Morningstar Inc., Chicago, they appear to be poised for a turnaround if 1994 investment results are any indication. In the year ended March 31, the U.S. fund was up 8.18%, far exceeding the Standard & Poor's 500 Stock Index's 1.46% while the international fund was up 21.96%, slightly below the Morgan Stanley Capital International Europe Australasia Far East Index's 22.8% but ahead of the lion's share of international managers.
Vanguard has every reason to be patient. The funds no longer represent a key entre into the institutional market as they did when they were launched in the early 1980s with initial investment minimums of $25,000 to attract small pension, defined contribution and endowment and foundation funds.
In fact, Vanguard now has strong institutional participation in many domestic stock funds - including Windsor, Windsor II and its Index Trust 500 fund - partly because of its low cost structure.
The Trustees funds "are not our dominant (institutional) offering in either market," - international or domestic, said Jeremy G. Duffield, senior vice president of Vanguard.
"They're important to have, but are not our biggest sellers in the defined contribution market. Recently they haven't attracted a lot of new institutional monies," he added.
Nevertheless, on the international side, Vanguard's only actively managed alternative to the Trustees fund is the high-flying Vanguard International Growth fund managed by Schroder Capital Management International, London.
While the domestic fund is growing nicely under its new manager, the international fund has grown more slowly, but steadily, Mr. Duffield said, noting Schroder, which has a more aggressive style, probably is better known in international than Batterymarch.
John Geewax, chief investment officer of Geewax, Terker, said a number of Batterymarch clients withdrew from the domestic fund when Batterymarch was terminated, causing assets to decline to between $60 million and $70 million from $110 million in April 1992. Now assets are back up to $130 million, because of stock market appreciation and new accounts. The firm runs $2.5 billion, including separate accounts.
While Geewax Terker, like Batterymarch, follows a quantitative approach, the similarities end there. Batterymarch had a strong value - if not contrarian - bias.
Geewax's style combines value and growth stocks. The fund currently has 60% in value and 40% in growth - a high growth percentage for the fund. "Growth is by definition relative. If it's 60% to 70% of a portfolio, then it's not really growth," he said.
Mr. Geewax expects the 40% allocation to hold fairly steady for the next four years as long as interest rates are relatively low. Still, the portfolio which includes 350 stocks, is rebalanced daily.
He said the fund's below-average, two-star rating from Morningstar reflects the prior five years performance under the previous manager.
"In five years we'll be five stars. By then we will have dropped Batterymarch's past record," he said.
Mr. Geewax has a strong incentive to keep his word. "Our fee is all performance based," he said.
The fund's value-oriented holdings include Intel Corp., Philip Morris Cos. Inc., Exxon Corp., Amerada Hess Corp. and the New York Times Co. - companies that he expects to have positive earnings surprises in the next quarter. By sector, the emphasis is on financials, electric utilities and capital equipment.
In growth, Mr. Geewax's strategy is to minimize risk rather than find the next Wal-Mart Stores Inc.
"On the value side, I'm a defense attorney; on growth, I'm a prosecuting attorney," he said.
Growth holdings include: First Brands Corp.; Federal-Mogul Corp.; Mead Corp.; The Good Guys Inc.; Briggs & Stratton Corp. and Cooper Tire & Rubber Co. He likes many small companies and such sectors as consumer goods, where international sales are strong; natural gas; financial institutions - particularly those accumulating invested assets from individuals; and transportation stocks.
Mr. Geewax said the choppy short-run performance of the fund is to be expected, given his hybrid style.
"I expect two to three really good quarters and then a bad one," he said. March and April of this year and October and November 1993 were the fund's recent down periods, but its two-year return is almost double that of the S&P, he said.
Also making a comeback is Vanguard's Trustees International fund, which ranked in the lower half of the Morningstar group of international stock managers from 1990 through 1993, after having been in the top half during the 1986 to 1989 period.
1993's underperformance stems mainly from the fund's underweighting in Pacific Rim markets last year when they rallied. The fund's manager was vindicated this year when many of those markets tanked. In contrast, Trustees International was heavier in Japan than most managers and the market is now making a comeback.
In a clear sign of a turnaround, the international fund ranked in the top 15% of all international stock funds ranked by Morningstar in the year to date through May 31.
The fund's strong 1994 performance also reflects its affinity for smaller stocks. While 70% of the EAFE consists of stocks with a market capitalization of more than $5 billion, only 30% of the Trustees fund represents such stocks.