Vanguard Global Capital Cycles
is a hidden gem. For years, the fund, which launched in 1984, was called Vanguard Precious Metals & Mining, and was generally mediocre as a sector-specific precious metals fund.
Then, in mid-2018, Vanguard changed the fund’s strategy and name, and its manager to Keith White of Wellington Management. Since then, it has been firing on all cylinders. The fund has beaten 97% of its peers in Morningstar’s Global Large-Stock Value fund category in the past five years with a 14% annualized return. Yet because of its previous strategy and record, it only receives a three-star Morningstar rating. It has a 0.44% expense ratio, low for an active fund.
White’s strategy is unusual, especially for Vanguard. He looks for companies in industries that are suffering from shortages in capital investment. Though the individual companies are chosen by old-school bottom-up stock-picking, the industry selection can be top-down or macroeconomic in nature. Vanguard typically runs its index funds and subadvises its active funds to purely bottom-up stockpickers.
Vanguard Global Capital Cycles always maintains a 25% exposure to mining stocks like
as both an inflation hedge and as a legacy exposure to the fund’s predecessor. Mixed in with that exposure are tech stocks like
and
financial stocks like
and Brazil’s
energy stocks like
and
and healthcare names like
Pfizer
,
forming a truly eclectic portfolio that can perform well in different kinds of environments.
White views the fund as a “core holding” because of its ability to perform well even in difficult environments. “The best way to compound is to avoid big negative numbers,” he says. He points to 2022, when the fund was up 7.4% because of its exposure to mining, energy, and insurance stocks while the S&P 500 was down 18.2%. Yet it still delivers in rising markets, producing a respectable 10% in 2023’s tech boom and a healthy 5.6% so far this year, thanks to its tech exposure.
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The key to White’s strategy is figuring out industries’ capital cycles and the companies that need new investment to increase the supply of their products. These are often industries that are struggling, so investors have avoided providing them with new debt or equity to finance their businesses. But they can also be ones that are healthy but unable to match their supply with demand, so they need more capital. Because there are production shortages in such industries, companies in them tend to be able to raise prices, so they can actually match or even benefit from inflation.
“The capital-cycle process leads you to areas where others are not,” White says. “One thing that erodes compounding is inflation. And this is where our focus on scarcity—owning assets that can provide inflation protection—helps. They help protect you against the big negative numbers.” This strategy also makes the fund a useful diversifier. “From a total portfolio perspective, most of my clients have plenty of exposure to things like the Magnificent Seven or the
” he says. “We provide value by giving them exposure to attractive areas they’re probably not getting much exposure to.”
Although the fund has a 16% tech weighting—a significant increase from its 3% weighting at the end of 2022—White isn’t buying high-priced artificial-intelligence stocks. He’s more interested in traditional hardware memory storage, such as non-AI chips, motherboards, and cards. Hence his investments in Intel and Texas Instruments. But his largest holding in the space is Korea’s
which has a 16 forward price/earnings ratio, less than a third of
Nvidia
’s
51. White bought it in March 2023, according to Morningstar.
“The memory [storage] cycle is a generic capital one—very cyclical,” White says. “Since the end of 2021, we’ve been in a down cycle, and that has shown up in inventory building, prices coming down, and returns falling.” That cycle is bottoming, he argues. He likes Samsung’s strong balance sheet and its microchip foundry, which he believes can provide an alternative source of production to competitor
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Tech companies have been seeking to diversify away from Taiwan as a chip source because of its geopolitical risk from China. “Samsung’s [profit] margins are about a third of Taiwan Semiconductor’s,” White says. “I don’t think there’s much risk to the margins going lower.”
Three other industries that White calls undercapitalized are copper mining, electrical grids, and engineering and construction, or E&C. All three are interconnected. Copper is necessary for updating and expanding electrical grids worldwide, which needs to be done for sustainability reasons and to handle increased demands for electricity from data centers and electric cars. But White says copper is significantly underpriced given miners’ production costs. “To justify a new greenfield [copper mining] project requires copper above $7 a pound,” he says. It currently trades at about $4.50 a pound.
He likes Barrick Gold because of its large scale and efficiency as a miner, but also because it is a major copper as well as gold miner. Two other top holdings,
and
are also key copper players.
For the grid buildout, White likes utility
which he calls “very mispriced, because while it has a lot of growth in its grid and a lot of growth in renewable [energy], it still is operating many coal-fired power plants. But they have plans to close them all down.”
To build out the grid and many other necessary infrastructure projects that stalled during the pandemic, countries need skilled engineering and construction firms. A number of E&C companies have gone bankrupt in the past 15 years. Stock of fund holding
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got as low as $3 in March 2020 as Covid raged. Now it trades for about $45 as demand for its services far outstrips supply, since many competitors have disappeared.
“Everybody’s calling up and asking them to get pricing for new projects, and they can’t even price all the projects that they’re being asked to do,” White says.
Exploiting such shortages is what makes White’s fund so profitable. B
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