(PUB) Vanguard Advisor

As for outperforming its benchmark over a single one-year or three-year period and underperforming over a five- or 10-year period, well, this still doesn’t give a good picture of just how poorly this multimanaged mess has done. Even a quick glance at the first chart on page 5 makes it pretty darned clear that, over the decade through March, the fund has been a serial underper- former. During that period, Vanguard hired three firms and fired two. But nothing seemed to work to pull the fund out of its slump. So now they’ve hired yet another fund management team. Vanguard claims that, “When these managers are combined, several indi- vidual teams are focused on their best ideas and can create a better portfo- lio.” But I find it incredibly difficult to believe that a fund with no fewer than 650 stocks at the end of May rep- resents a focus on the “best ideas” of the first seven different management teams and 15 different managers. And that’s not counting whatever additional

EXPLORER FROM PAGE 1 >

More Additions Than Subtractions

over the 10-year period ending in March 2014. But the comparisons fall flat. First off, comparing a Vanguard fund to more expensive peers is silly. Quite frankly, as Vanguard inves- tors, you and I already expect that Vanguard’s low costs are going to work to our advantage. Beating peer funds is, in most cases, a layup, and simply a way for Vanguard to make the fund’s performance look strong. I’d call that obfuscation. If Explorer didn’t outpace most of its peers, that would truly be a black eye for the fund and for Vanguard.

Total assets (billions)

A Cast of Managers Inception Hired 2/90 Hired 8/97 Hired 8/97 Hired 4/00 Hired 2/05

Mgmt. firms

Firm

Wellington Granahan Chartwell Vanguard

— 1

$0.3 $2.4 $2.4 $4.0 $9.6

2 3 4 5 6 7 6 7 6 7

GMO

Kalmar

AXA Rosenberg Hired 6/07 $12.6

GMO

Fired 2/08 $10.2

Century

Hired 6/08 Fired 8/10

$9.0 $8.0

AXA

Stephens Arrowpoint Hired 8/13 $11.2 Hired 6/14 $12.4 8 Note: Granahan, which originally managed the Explorer II fund, joined Explorer through a merging of the two funds in 1990.

“best ideas” the two members of the Arrowpoint team bring to the party.

Who’s Managing What Wellington

32% 23% 17%

Kalmar

Thou Dost ProtestToo Much With the addition of Explorer’s eighth team, Vanguard went all out to convince the press and shareholders that its longstanding multimanagement strategy is a sound one. But consider

Granahan Century Chartwell Stephens Vanguard Arrowpoint

7% 7% 6% 4% 4%

INTERVIEW > GREGORY DAVIS An Interest in Rates

Ultimately, I will try to make the operation and the team stronger and better from a development standpoint. I think we have a huge oppor- tunity ahead of us to continue to develop capabilities outside just the U.S. markets. When my time here is over, ideally, I’d have left the place better than how I found it, have a stronger team in place, and have had extremely strong performance in a highly risk-controlled way. When you say capabilities outside of the U.S. market, are you talking about more foreign bond funds, or Vanguard’s presence outside the U.S.? All of our active management is U.S.-focused. We do have a U.K.-based team, but it’s still relatively small. I would like to see that evolve over time. There are markets where we don’t invest now, and we could add value— particularly in the investment-grade space, getting beyond sovereigns. Let’s talk about the bond market. People often assume that if rates are no longer falling, then they must be rising. But what about a period of flat, range-bound rates? Absolutely, that’s a very highly probable scenario, where you are range-bound without huge movements up or down in the market. A lot is going to depend on how economics play out. If you are in a muddle- along scenario with moderate growth and low inflation, until you see either one of those two things give, either to the upside or the downside, you could easily stay in a range-bound bond market environment.

GREG DAVIS, 43, is Vanguard’s new bond chief, but he’s no stranger to the firm, having come aboard in 1999 after short stints on Wall Street and a longer job in the insurance business earlier in his career. He’s been an index fund manager and group leader, and spent some time in Vanguard’s Australian office. It’s clear that with his return stateside, he’s bringing

a lot of energy to the job, which he’ll need given the potential for a bond market that won’t exhibit the same “wind at our backs” characteristics as the markets his predecessors enjoyed. Where interest rates are headed is always a topic for discussion, but Greg also let Jeff DeMaso and me know that he’s got his eyes on developing some corporate bond funds for foreign investors, who until now only had access to sovereign credits through Vanguard. But I’m getting ahead of myself, so listen in.

Greg, first of all, congratulations on your new job, and welcome back. Thank you. It’s good to be back.

You’ve followed just two other bond chiefs at Vanguard. Ian MacKinnon diversified offerings at Vanguard, and Bob Auwaerter introduced the first foreign bond funds and helped you put ETF options on the map. What are your plans?

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