UPDATE: Vanguard Explorer trails manager it fired

UPDATE: Firing outside managers, as Vanguard has done three times for its Explorer mutual fund since December, doesn't always boost returns. 

For example: In December, Vanguard dropped Tri-State Bank's Chartwell Investment Partners, of Berwyn, from Vanguard's Explorer and Mid-Cap Growth funds. How'd that go?

"Since Vanguard allocated the Explorer Funds from Chartwell, our product. Small Cap Growth, has outperformed the Explorer Fund by 3.5%," notes Timothy Riddle, managing partner and CEO of Chartwell. And "since Chartwell was removed from the Mid Cap Growth Fund, our product has outperformed that fund by 1.8%." (Those funds are VEXPX and VMGRX, respectively.)

EARLIER: Vanguard Group, the $4 trillion, Malvern-based investment giant, says it has hired ClearBridge Investments LLC, New York, to replace two much smaller firms -- Kalmar Investment Advisers of Wilmington, Del. and Granahan Investment Management, Waltham, Mass. -- investing around $1.8 billion of its $12 billion Vanguard Explorer stock fund.

Vanguard Explorer's record "fails to distinguish itself" from the benchmark Russell 2500 Growth Index, Morningstar writes here. According to Morningstar data, $10,000 invested in Explorer (VEXPX) in March 2007 would be worth around $20,600 today, vs. $21,000 for the S&P 500 fund (net of fees.) Explorer also trailed in the recent five- and three-year periods, though it beat key indices over the past 12 months.

ClearBridge, founded in 1962, targets stocks that are potential "category leaders" that invest for "long-term, sustainable growth," Vanguard said in its statement.  According to SEC data complied by Nasdaq, ClearBridge at Dec. 31 invested $97 billion in nearly 1,200 companies, especially tech, healthcare and consumer  stocks, led by UnitedHealth Group, Comcast Corp. (Philadelphia), Biogen, Anadarko Petroleum, Microsoft, TE Connectivity (Berwyn) and J&J, among others.

For the firms Vanguard is dropping, the loss represents significant assets. At Dec. 31, Kalmar had $2 billion invested in 127 socks, particularly consumer cyclicals and healthcare, led by West Pharmaceutical, Acxiom, Wageworks and Cooper Cos. Granahan had $3 billion in 254 stocks, with more than half in tech or healthcare, led by Abiomet, Brooks Automation and LendingTree.

ClearBridge managers who will handle part of Explorer include Jeffrey Russell, Derek Deutsch, Brian Angerame, and Aram Green.

"After years of sitting on its hands it appears Vanguard is finally getting 'active' with its management of the fund," writes Jeff Demaso of the Independent Adviser for Vanguard Investors newsletter, adding that few Vanguard directors own Explorer shares.

"Explorer has long been weighed down by multiple sub-advisers," DeMaso added, noting that Explorer "has been outperforming" its target since December (but also note, at top, that the Chartwell portfolio, which Vanguard dropped last year, says it has been outperforming the Vanguard funds it used to co-manage.)

Explorer advisers will now include Wellington Management (around $4 billion), Vanguard Quantitative Energy Group (more than $2 billion), and ClearBridge, Arrowpoint Asset Management, and Stephens Investment group, which split the rest (plus a small cash position). Vanguard doesn't expect the move to change Explorer expense ratios.

Vanguard CEO Bill McNabb said in his statement that the company's Portfolio Review Department will "scour the globe" for better "active" stock-pickers. 

Though it's well-known as a purveyor of funds indexed to the S&P 500 and other market benchmarks, Vanguard traces its origins to its actively-managed Wellington stock-and-bond fund, started in 1929, and to active manager Wellington Management Co., which remains a Vanguard fund advisor, with offices in Boston and Philadelphia.

Around one-third of the company's current investments are in actively-managed funds, which generally charge higher fees than index funds. Morningstar says Explorer's fees are "low" compared to others in its class. Vanguard says that "over the past 10 years, 95% of Vanguard’s actively managed funds outperformed their peer group averages," citing data from Lipper.