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Question for mutual fund investors: Is “Average” good enough? Should the really good mutual funds not achieve above average returns? It seems like the answers should come out as obvious. We thought it might be obvious, too, but when looking at the Vanguard Selected Value Investment Fund (VASVX), the answers may not come to easily. This particular mutual fund is a mid-cap equity fund. It’s returns have surpassed the S&P 500′s returns every year since 2000 except once, in 2007. It returned negatively only twice in that same period (and remember, virtually every equity fund returned negatively in 2008). Yet when compared to its peers – and apples-to-apples comparisons are essential when look at mutual funds – this Vanguard fund does not really stand out.

A Superior ‘Average’ Mutual Fund

With double-digit returns more of the norm than the exception here, the Vanguard Selected Value fund is definitely a superior mutual fund. Its performance overshadows the S&P 500, which is often enough to keep most investors happy. Its 10-year trailing total return is nearly 9%, its 5-year trailing total return is 4.25%, yet its 3-year total trailing return is -2.11%, a good 4% better than the S&P 500 but just 1.5% better than its peers of mid-cap value funds.

Morningstar rates this equity fund as a 4-star fund. We like it for the value it can provide to virtually any portfolio, notwithstanding the fact that midcap equities have outperformed their large cap counterparts so far this year. We also like the generous 1.4% yield that this equity fund generates.

Overall, this a $3.5 billion mutual fund. With such assets under management, one might suspect difficulties in terms of asset management. But this fund holds just 67 different equity positions, more toward the lower end of what they can do. To us, this speaks to management’s conviction and commitment to the fund’s overall strategy. Collectively, these securities represent 25.2% in Financial Services firms which is in line with its peers and among which Capital One at 2.25% of holdings finds itself. The next largest sector is Consumer Services at 17.8%, where Family Dollar Stores is present at 1.83% of holdings, allowing the fund to enjoy part of this security’s 68.3% YTD return. It’s third largest sector is Industrial Materials at 16.3% of assets, where Eaton Corporation at 2.04% of holdings has helped the fund with its 40% YTD Return.

None of the individual stocks are among the mutual fund’s Top 3 holdings, which we will look at next. But their presence alone in the fund have contributed greatly to its YTD return of 7.52%, nearly doubling that of the S&P 500, but falling short of its peers’ average by 0.84%.

This Fund’s Top Holdings Tell A Story

The Top 3 equity holdings for this mutual fund tell an interesting story. With $3.5 billion under management and just 67 equity positions, the top 3 need to tell a good story. A really good one, even for an “average” mutual fund.

Pinnacle West Capital at 2.49% of holdings, YTD return of 18.9%

This utility play offers a sexy 5% dividend and is also one of the cleanest energy producers out there, with big investments in solar energy. What makes this an attractive play is in the population’s shift from less popular energy generation, like coal and nuclear toward alternative energy sources like those used by Pinnacle. Of course, the risks are there as well. Pinnacle faces an uphill battle now that there will be no carbon tax on the bigger polluters. As well, since Pinnacle is a big energy reseller, it is heavily involved in a money losing business since bought energy is resold at cost. No benefits there, yet this Vanguard fund is still adding to its position.

Yamana Gold at 2.3% of holdings, YTD return of -8%

This gold producer is a popular mid-cap equity choice for a lot of investors. Despite its negative YTD return, this equity remains attractive with its healthy pipeline, unhedged gold prices (which could quickly turn into a big risk), as well as its expense management. Yamana is another position that the Vanguard fund continues to increase its exposure to.

Goodrich Corporation at 2.25% of holdings, YTD return of 27.6%

This Industrial Materials firms produces key parts for aircraft manufacturers like Boeing and Airbus. Previously, this would have been seen as a higher risk holding given that spending in the aerospace industry had slowed. However, as we learned on October 27, 2010, Durable Goods orders increased recently thanks to a doubling in aircraft orders, according to stats found at Bloomberg. This spells profits for Goodrich, which is the supplier of choice for the big aircraft manufacturers.

Overview of Top Holdings

This mutual fund’s top holdings tell a story of keen analysis and superior stock selection. The results speak for themselves and despite potentially shifting opinions on some of these holdings, the fund continues to forge ahead with its long term plans. This type of discipline speak clearly to investors – trust the plan.

Who Should Own This Fund?

The Vanguard Selected Value Investment fund is a good core equity investment. With its focus on mid cap value equities, more conservative or balanced investors should look at limiting their exposure here to half of their core holdings, perhaps even less. However, as a mid cap equity fund, it does allow greater equity diversification, even when limiting their exposure.

For more aggressive investors, the Vanguard Selected Value Investment fund can make up their entire core equities holdings, provided they understand the scope of the product and what its aims really are: midcap value.

Ultimately, this is a strong product, a solid producer and a very well managed mutual fund.