As the case for value investing grows stronger, value stock funds have proliferated in the fund universe. Vanguard, the largest mutual fund company in the world, offers one of the biggest selections of funds for building a diversified, core/satellite investing strategy just around value stocks.

Research has shown that value stocks offer greater upside potential over the long term with less volatility than growth stocks. History also shows that small- to mid-cap stocks tend to outperform large-cap stocks over the long term, but with greater volatility. An optimized value portfolio should include a core holding of large-cap value stocks and some satellite holdings covering mid- and small-cap value stocks. Depending on your risk profile, your core holding allocation should be large enough to temper the higher volatility of the satellite funds, while the broader exposure to different stock market segments tends to smooth out returns. Increase your satellite allocations if you are willing to assume more risk for greater returns.

To build a well-diversified portfolio, a value investor could start with the Vanguard Value Index Fund as a core holding, and then diversify more broadly with the Vanguard Small Cap Index Fund and the Vanguard Selected Value Fund as satellite holdings. These three funds are Vanguard’s best and lowest-cost performers in the value investing category.

Vanguard Value Index Fund

With more than $37 billion in assets, the Vanguard Value Index Fund is one of the largest and one of the more successful value funds on the market. The fund, which is considered to be a core holding, employs a long-term buy-and-hold approach investing in stocks that make up the CRSP U.S. Large Cap Value Index. It is currently invested in 325 stocks that the fund managers consider to be undervalued and out of favor with investors. The fund targets several sectors, including financial, technology, health care and oil and gas, with Exxon Mobil, General Electric and Microsoft among its top holdings. The fund has returned 6.33% over the last 10 years and 11.54% over the last five years. The fund has low turnover, which helps to keep its expense ratio of 0.23% among the lowest in its category.

Vanguard Selected Value Fund

The Vanguard Selected Value Fund is an actively managed fund that targets undervalued companies in the mid-cap range, which makes it an ideal satellite holding for a portfolio. The fund invests its $9.2 billion of assets in 128 stocks, which can include up to 25% in non-U.S. companies. The financial services and industrial sectors are highly represented among its holdings because they tend to have large numbers of companies that are considered to be undervalued or out of favor. As an actively managed fund, Vanguard outsources its management to three subadvisors that handle different aspects of the fund's management. Overall, the fund's managers employ a long-term buy-and-hold approach, willing to give underperforming companies time to turn things around. The strategy can pay off for patient investors who have seen an average annual return of 7.74% over the last 10 years and 11.05% over the last five years. For an actively managed fund, its expense ratio is very low at 0.39%.

Vanguard Small Cap Value Index Fund

To round out the core/satellite value investing strategy, the Vanguard Small Cap Value Index Fund captures the small-cap range of stocks offering even greater upside potential. The fund has more than $16 billion of assets spread across 850 holdings consisting of small-, mid- and micro-cap stocks. Among its top holdings are Alaska Air Group, Goodyear Tire & Rubber and Rite Aid. The fund's objective is to mirror the Center for Research in Security Prices Small Cap Value Index, which it has done consistently since its inception in 1998. It has returned 7.17% over the last 10 years and 10.26% over the last five years. Its expense ratio of 0.23% is considered to be average for its category.