Is seven the magic number for Vanguard Explorer?

The Vanguard Group Inc. has added a seventh subadviser and 12th portfolio manager to the $11.4 billion Vanguard Explorer Fund (VEXPX). Stephens Investment Management Group LLC and its chief investment officer, Ryan Crane, were named to the fund Monday, Vanguard said. Stephens is expected manage a “substantial” percentage of the fund's assets within 12 to 18 months, Vanguard spokeswoman Emily White said. She declined to specify the target percentage or which subadvisers would see their assets fall as a result. Vanguard Explorer is managed primarily by Grantham Investment Management Inc., Kalmer Investment Advisers and Wellington Management Company LLP, which handle 76% of the fund's assets combined. Century Capital Management, Chartwell Investment Partners and Vanguard Equity Investment Group manage the rest of the fund. Vanguard Explorer, the second-largest actively managed small-cap fund, has performed well relative to its peers, finishing in the top half of its category over the trailing three- and five-year periods, according to Morningstar Inc. But the fund has had a harder time beating its index, the Russell 2500 Growth Index, and its small-cap-growth exchange-traded-fund sibling. Over the past 10 years, the fund has underperformed its index annually by 85 basis points a year, according to Vanguard's website. The $3.18 billion Vanguard Small-Cap Growth ETF (VBK) has also outperformed it by about 100 basis points annually over both those time frames, though it should be noted the Explorer Fund has more leeway to invest in midcaps than the ETF, which is strictly a small-cap vehicle. The addition of Stephens wasn't a reaction to the fund's performance versus its benchmark, said Dan Newhall, a principal in Vanguard's portfolio review department. “We're always hunting for what we think are world-class managers who could complement the managers we are using today,” he said. “As we grew increasingly comfortable [with Stephens], we felt they would be a nice addition to the Explorer fund.” Vanguard's multimanager approach to actively managed portfolios is based on the belief that reducing individual manager risk and combining managers that complement each other will lead to better risk-adjusted returns over the long term. Naysayers point out the risk of overdiversifying by having multiple managers combing for ideas in a single asset class, but Vanguard doesn't see it as a necessary evil. “That could be a risk, but it's one we're very aware of,” Mr. Newhall said. “We're very thoughtful about how we put managers together in a fund.”