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AA-rated small-cap star's fund to close as boutique & Vanguard split

AA-rated small-cap star's fund to close as boutique & Vanguard split

Granahan Investment Management has ended its three-decade relationship with indexing giant Vanguard Group in a move that will result in the US Discoveries fund being liquidated, Citywire Selector can reveal.

The Boston-based independent investor focuses on small-cap funds and runs close to $1 billion across a host of strategies. It has sub-advised on a number of funds on behalf of Vanguard since 1985.

Shareholders were alerted to the decision to end the tie-up on the morning of March 20, with Vanguard Group removing Granahan Investment Management (GIM) from both the Vanguard Explorer and Vanguard US Discoveries fund.

The latter fund, which is overseen by Citywire AA-rated Gary C. Hatton, was a former Star Manager subject and was soft-closed to new investors after reaching $160 million in December 2013.

Having underperformed in 2015, Hatton has since turned around performance and returned 38.6% over the 12 months to the end of February 2017. This is while the average manager in the US Small- and Mid-Cap sector returned 28.9% over the same period.

It is understood Vanguard Group wanted to increase the assets it garnered from small-caps but this was not deemed workable with the size of the US Discoveries fund and its investment philosophy.

The fund will revert to Vanguard’s control on April 3 and investors will have a window to redeem assets before it is formally liquidated shortly after.

However, GIM, which operates its own Ucits platform, intends to launch a replica strategy operating with the same investment philosophy before the Vanguard fund closes.

It also plans to further expand its overall funds range with a number of new funds, which includes a global small-cap fund for US investors.

Meanwhile, on the small-cap Vanguard Explorer fund, Vanguard has sought to concentrate this multi-manager approach on larger asset managers and removed two boutiques – including GIM. Kalmar Investment Advisers is the other group to be removed.

This will see the number of assets managers reduced to five, which are Wellington Management Company, Stephens IM, Arrowpoint Partners, ClearBridge and Vanguard itself. 

Over the period since launch, the Vanguard US Discoveries fund returned 283% in US dollar terms. Its Citywire-assigned benchmark, the Russell Microcap Growth TR, rose 130% over the same 13-year period from July 2004 to February 2017.

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