Primecap Diversifies Beyond Vanguard
Mutual fund giant Vanguard Group decided in March that two of its stock funds were getting too hot for their own good, so it closed them to new investors.
A few months later, Pasadena-based Primecap Management Co., the renowned stock picker that manages the two funds under contract with Vanguard, came back with a surprising announcement: It would launch its own fund family.
By late summer, Vanguard had two new ideas: It would give Primecap a fee increase on the flagship closed fund -- and would open a new Primecap-managed fund under the Vanguard label.
The sequence of events has been a hot topic in the fund business because it suggests a spat between two of the industry’s most respected names. But publicity-shy Primecap declines to discuss its business, so exactly what happened isn’t clear.
One thing is: Closing the funds to new investments was a hit to Primecap’s income because the firm is paid based on the value of assets managed.
“There’s no indication that Primecap asked Vanguard” to halt the flow of cash into the funds, the $25-billion Vanguard Primecap and $7.5-billion Vanguard Capital Opportunity portfolios, said Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter.
After Primecap decided to bring out its own line of competing stock funds, “I think Vanguard blinked,” Wiener said.
Under new pacts between the two firms, Primecap will be able to attract fresh fee-generating assets via the Vanguard Primecap Core fund, which Vanguard expects to launch in the next few months.
And Primecap will earn higher management fees on the closed Vanguard Primecap fund. The increase by Valley Forge, Pa.-based Vanguard is a rarity for the penny-pinching firm.
Jeffrey Molitor, director of portfolio review at Vanguard, wouldn’t say whether Primecap agreed with the decision to close the funds. He said it was made to protect current shareholders from a potential torrent of new cash, after the funds’ returns soared in 2003.
Fund managers sometimes can be tripped up by a flood of hot money if it comes in faster than they can wisely invest it.
In any case, this year could mark a major turning point for Primecap, which was founded in 1983. Although the firm has racked up market-beating gains in its Vanguard funds, some industry analysts long have wondered why it remained so reliant on Vanguard, as opposed to taking on a broader roster of clients.
Primecap manages about $40 billion, more than 80% of which is in its Vanguard funds.
By creating three stock funds of its own, Primecap could lessen its dependence on Vanguard. The move also could provide a new growth vehicle for the firm, which is important for the younger partners there, said Jeffrey Ptak, an analyst at fund tracker Morningstar Inc. who recently met with Primecap.
The firm is known for its research-driven stock selection and for being a patient investor. Over the last 10 years, the Vanguard Primecap fund gained 300%, compared with 186% for the Standard & Poor’s 500 index.
Primecap’s new funds, under the Odyssey label, are expected soon, and Ptak believes they will essentially “clone” the two closed Vanguard funds and the new Vanguard Primecap Core fund. But the Odyssey funds will have higher management fees than the Vanguard funds.
The big challenge for Primecap will be marketing the new funds, Wiener said. The company has no experience pitching itself. In fact, Primecap as yet doesn’t even have a website.
