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Vanguard drops GMO as funds co-manager

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Bloomberg News / February 27, 2008

Vanguard Group, the second-biggest US mutual-fund company, dropped the Boston-based GMO LLC investment firm run by Jeremy Grantham as co-manager of three domestic stock funds that lagged behind peers in the past year.

GMO was removed from the $10.5 billion Explorer, the $975 million Vanguard US Value, and the $695 million VVIF-Small Company Growth Portfolio, Vanguard said yesterday. Vanguard, based in Valley Forge, Pa., replaced the Grantham firm with its own quantitative equity group, which uses mathematical models to pick stocks.

The Explorer fund, which invests in US small-company stocks, slumped 11 percent in the past year, trailing half of its peers, according to data compiled by Bloomberg. Grantham, whose firm oversees $157 billion, said in a Jan. 23 interview that investors should avoid equities and hold cash during what he called worst US financial crisis since World War II. "There are plenty of bad things left in this cycle," Grantham, 69, said.

Dubbed a "perma-bear" for his dour view on US equities for more than a decade, Grantham correctly predicted a crash in technology stocks two months before the bubble burst in March 2000. GMO had managed the Vanguard fund since 2000.

Tucker Hewes, a spokesman for GMO, declined to comment.

The US Value Fund slumped 8.1 percent in the past year, trailing 61 percent of rival funds that invest in stocks deemed cheap based on financial yardsticks such as earnings, Bloomberg data show. The VVIF Small Company Growth, offered to institutions and through advisers, slumped 9.9 percent in 2007, four times the pace of the benchmark Russell 2500 Index, according to data on Vanguard's website.

Vanguard picked Prudential PLC's M&G Investment Management to manage a portion of its largest actively managed non-US fund, the $18.3 billion Vanguard International Growth fund and the $1.9 billion VVIF-International Portfolio. London-based M&G joins Schroder Investment Management and Baillie Gifford Overseas Ltd. in managing the non-US funds.

Vanguard's quantitative group has $25 billion active equity fund assets. Vanguard manages $1.25 trillion in US mutual-fund assets. It ranks second to Fidelity Investments in Boston, which manages $1.6 trillion.

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