Introductory note to fund management:•The fund is a compartment of Vanguard Investment Series Plc, an Ireland-domiciled SICAV (UCITS).
• The investment adviser for the fund is The Vanguard Group, Inc. (VGI), Pennsylvania (USA).
• The investment sub-adviser for the fund (day-to-day portfolio management) is PRIMECAP Management Company (PRIMECAP), which is based in Pasadena, CA, USA. The Vanguard U.S. Opportunities fund is co-managed by:
Howard B. Schow Theo A. Kolokotrones Joel P. Fried Alfred W. Mordecai David H. Van Slooten
Howard B. Schow - Portfolio Manager, Chief Investment Officer and Principal
Mr. Schow was a founder of PRIMECAP Management Company in September 1983. Previously he spent 27 years with the Capital Group, Inc. most recently as chairman of the board of Capital Research and Management Company. From 1966 to 1982, he served as chairman of the investment committee. He was president, founder and lead portfolio counselor of AMCAP Fund. He was also a portfolio counselor of Investment Company of America and American Mutual Fund, two other mutual funds managed by Capital Research and Management Company. He joined Capital Research Company in 1956 as a financial analyst and field contact representative in the New York office. He has been a portfolio counselor since 1961. Mr. Schow is a graduate of Williams College and the Harvard Graduate School of Business Administration. He is a member of the New York Society of Security Analysts and the Los Angeles Society of Financial Analysts.
Theo A. Kolokotrones - Portfolio Manager and Principal
Mr. Kolokotrones was a founder of PRIMECAP Management Company in September 1983. He spent six years at Capital Research Company, most recently as senior vice president. He was a financial analyst with research responsibilities in the health care, airline, connector, and electrical equipment industries. He has had portfolio management responsibilities since 1979. From 1970 to 1977, he was vice president and senior financial analyst at Smith Barney, Harris Upham and Company in New York. Mr. Kolokotrones is a graduate of the University of Chicago and the Harvard Graduate School of Business Administration.
Joel P. Fried - Portfolio Manager, Director of Research and Principal
Mr. Fried joined PRIMECAP Management Company in June 1986, upon graduation from the Anderson Graduate School of Management at UCLA. He spent one year as a financial analyst with Hughes Investment Management Company, a wholly owned subsidiary of Hughes Aircraft. Mr. Fried received his undergraduate degree in Economic System/Science from the University of California, Los Angeles.
Alfred W. Mordecai - Portfolio Manager and Principal
Mr. Mordecai joined PRIMECAP Management Company in August 1997. From 1990 to 1995, he worked as a nuclear engineer and program manager for the Naval Nuclear Propulsion Directorate, a joint U.S. Navy and Department of Energy organization. In 1996, he was an associate at McKinsey and Company. Mr. Mordecai graduated with a degree in mechanical engineering from Duke University. He has a master’s degree in systems engineering from Virginia Polytechnic Institute and State University and a M.B.A. from Harvard Graduate School of Business Administration.
David H. Van Slooten - Portfolio Manager, Financial Analyst, and Principal
Mr. Van Slooten joined PRIMECAP Management Company in July 1996. Previously, he spent five years with KPMG Peat Marwick’s Corporate Finance Group, most recently as director. From 1987 to 1990, he worked for Deloitte & Touche where he was a certified public accountant. Mr. Van Slooten is a graduate of Brigham Young University and Northwestern University’s J.L. Kellogg Graduate School of Management.
The fund is managed following a multiple-counselor approach in which each portfolio manager independently manages a portion of the fund. In the multiple counselor system, investment decisions for their specific portions of the portfolio are the sole responsibility of the portfolio manager and are made independently of the other managers. Although the firm places a strong emphasis on individual decision making, the investment professionals do not work in isolation.
Performance Review 2005
PRIMECAP: "During the third quarter of 2005, U.S. stocks, as measured by the Russell 3000 Index, advanced 4.01%. The U.S. Opportunities Fund outpaced its benchmark index in the quarter, with the fund’s health care holdings accounting for much of the relative outperformance. On the downside, the fund’s consumer staples holdings weighed on performance.
For the year, the fund (+1.94% for the Investor Shares; +2.07% for the Institutional Shares) trailed the Russell 3000 Index (+6.12%), as the advisor’s strong stock selection in the consumer discretionary (+10.7%) sector was more than offset by poor stock selection in the biotechnology (–19.5%) sector."
Performance Review 2006
PRIMECAP: "During the second quarter of 2006, the U.S. stock market, as measured by the Russell 3000 Index (–1.98%), wavered. Poor performance in May drove the quarterly decline as investors questioned the sustainability of global economic growth. The returns of the U.S. Opportunities Fund (–4.31% for the Investor Shares; –4.29% for the Institutional Shares)—which invests primarily in more volatile small- and mid-capitalisation growth stocks—trailed the return of the index in the quarter. A bright spot in the second quarter was the advisor’s stock selection in the health care sector. The fund’s health care holdings (+1.9%) managed to post a positive performance despite broad weakness in the market.
For the 12-month period of 2006, the U.S. Opportunities Fund (+25.12% for the Investor Shares; +25.25% for the Institutional Shares) outperformed the Russell 3000 Index (+15.72%), due to the advisor’s strong stock selection in a variety of sectors, most notably information technology, health care and consumer discretionary."
Performance Review 2007
PRIMECAP: "The fund’s underperformance relative to the index was mostly due to the advisor’s poor stock selection in the information technology sector.
For the 12 months ended 31 December, the fund’s return (+8.10% for Investor Shares, +8.17% for Institutional Shares) outpaced that of the Russell 3000 Index (+5.14%). The materials sector was the largest contributor to performance in the quarter. Stocks such as Potash Corp. of Saskatchewan (+206%), Monsanto (+114%) and Minerals Technologies (+14%) served as notable positive performers in the sector, benefiting in part from booming agricultural demand in emerging markets. Although holdings in health care companies Conceptus (–10%) and Sepracor (–57%) hurt the fund’s 12-month performance, the fund’s overweighting in information technology (40.8% for the fund, versus 15.8% for the benchmark) and its underweighting in financials (3.2% versus 20.4%) boosted performance for the year."
Performance Review 2008PRIMECAP: "For the year, the fund underperformed the benchmark’s drop of –37.30%. The fund was mainly hurt by its significant overweighting to and poor stock selection within information technology. Leading detractors included semiconductor manufacturer NVIDIA (–76%) and equipment manufacturer Brocade Communications Systems (–61%). Positive contributions during the year resulted from the fund’s underweighting to financials and its significant overexposure to health care.´"
Performance Review 2009
PRIMECAP: "Over the fourth quarter, the U.S. economy showed signs of improvement, with many economic indicators evidencing recovery. As the outlook improved, stock markets around the globe posted strong returns as investors continued to shift their focus toward riskier assets. While unemployment remained high, the U.S. Federal Reserve began to focus more closely on how to unwind stimulatory measures in anticipation of continuing recovery. Against this backdrop, the MSCI US Investable Market 2500 Index, a broad measure of the stock market, returned 5.92%.
The fund returned 7.03%, outpacing the Russell 3000 Index, which posted a return of 5.57%. The majority of outperformance was attributable to a large underweight in the financial sector, and also to strong stock selection in consumer discretionary, consumer staples, and information technology sectors. Stock selection boosted relative performance in all but two sectors.
For the 12 months ended 31 December, several of the fund’s larger holdings performed exceptionally well."
Performance Review 2010 - Year-to-Date
PRIMECAP: "During the first quarter, the U.S. economy continued to show improvement, with many economic indicators pointing positive. While unemployment remained high, the U.S. Federal Reserve began to unwind stimulatory measures in anticipation of a continuing recovery. Despite a difficult stretch from late January to early February, equities markets proved resilient, posting strong results for the quarter as the Russell 3000 Index—a broad measure of the U.S. stock market—returned 5.94%.
The fund rose 8.95% in the three-month period, outpacing the Russell 3000 Index. Most of this outperformance stemmed from strong stock selection in the health care sector.
An underweight position in the financial sector weighed on relative performance, as the sector returned 11.4% for the period. In addition, an overweight position in Monsanto, a worldwide provider of agricultural products, detracted from results as the stock lost –12%.
Over the second quarter, concerns regarding the European sovereign debt crisis, as well as mixed economic signals, weighed on the performance of equities. The Russell 3000 Index—a broad measure of the stock market—returned –11.32%; the U.S. Opportunities Fund slightly outperformed the index."
Performance since 2005
Investment Process and Strategy – How does the Fund Manager Invest?
PRIMECAP builds the portfolio using a bottom-up approach. Each stock is examined and analyzed on its own merits. PRIMECAP makes no attempt to overweight or underweight a particular sector because of a macro-economic viewpoint on the future performance of the sector. Rather, sector weights are a result of stock picking.
Four distinct principles guide PRIMECAP’s philosophy of investment management: fundamental research, long-term perspective, individual decision-making and value. This philosophy has been the fundamental underpinning to PRIMECAP’s investment style since its founding.
First, PRIMECAP is committed to fundamental research. The primary objective of their research is to develop opinions independent of Wall Street and to have a deep understanding of the companies that goes beyond that of a mainstream industry analyst. Their research involves interacting directly with the companies they are reviewing, their competitors, suppliers and customers.
Second, PRIMECAP takes a long-term perspective. They look for stocks that will outperform the market over a three to five year time horizon. They strive to recognize values early, before the market reaches a similar conclusion. Often, their search begins with companies and industries that are currently out of favor among investors. Consequently, their investment ideas are frequently early. However, conviction derived through their research efforts gives them the strength to stay the course when the short term fundamentals are challenging if they believe the long term hypothesis is intact.
Third, individual decision-making is encouraged at PRIMECAP. They shun “group think” and committees whenever possible, and rely on individual decision-making in their investment process. To achieve this, the fund is run following a multiple counselor approach with 5 managers controlling each a portion of the fund. This implies that each portfolio manager independently takes all decisions on his part of the portfolio. PRIMECAP believes that individuals generate the best investment ideas, not committees.
Ultimately, the key to successful investment decisions rests in correctly appraising the relationship between the fundamental value of a company and the market price of its stock. A company may be valuable because of its ability to make money, its assets, or both. However, a company is a good investment only if it is purchased at the right price.