(PUB) Vanguard Advisor

WOULD YOU CHARACTERIZE perfor- mance that outpaced an index bogey by less than 20 basis points (0.20%) as “strong?” That’s howVanguard Chairman Bill McNabb termed it in the most recent semiannual report for Morgan Growth . I don’t mean to pick a fight with McNabb, who almost certainly doesn’t actually write the Chairman’s Letter he signs in every annual and semiannual report to shareholders. But come on! Morgan Growth’s managers haven’t, as a whole, earned a performance bonus since September 2010, and in the latest six-month period (based on the prior three years’ performance), they were dinged $1.9 million, which is consid- erable given that their all-in fees were $8.5 million. If Chairman McNabb, or, for that matter, any ofVanguard’s directors were shareholders in the fund and received a semiannual report characterizing this performance as “strong,” they might be critical as well. But neither McNabb nor any of Vanguard’s directors own shares in the fund. Alfred Rankin, a REPORTS Strong Language Human sacrifice, dogs and cats living together…mass hysteria! —Dr. Peter Venkman (Bill Murray), “Ghostbusters” INVESTORS ARE CONDITIONED to expect stocks and bonds will move in opposite directions. Coming into 2014, investors were pulling money from bond funds and adding to stock funds, on the expectation that if stocks continued to move higher, bonds would continue to decline. So with positive returns out of 500 Index , up 7.0%, and Total Bond Market up 3.9% so far this year, some investors and commentators are left

are making investment decisions for the portfolio, then it’s no wonder that the fund has been unable to outperform its Russell 3000 Growth bogey for years, as the chart to the left shows. So is the fund’s latest six-month performance strong? At the same time that Morgan Growth’s latest report was issued, McNabb uses the same adjec- tive to describe PRIMECAP Core ’s six-month return of 14.64%, which was 222 basis points, or 2.22%, better than its bogey, as well as Capital Value ’s, which was also ahead of its benchmark by over 2%. And he uses no adjective at all in noting that Global Equity “out- paced” its benchmarks by more than 2%. In all three cases, I’d characterize those returns as “strong.” But beating a benchmark by a few basis points, like Morgan Growth? Not so much. I highly recommend you stay away from this fund, which Vanguard labels one of its “Select” funds. I’m not sure how a fund earns the “Select” label, but I wouldn’t let that guide my investment choices. n

Morgan’sManyManagers 1.3 1.4 rising line = fund outperforms Russell 3000 Growth Index

Jennison hired as fourth manager

Morgan's first two "multi" managers, Franklin and Roll & Ross, added

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▼ Kalmar and Frontier

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Husic added as fourth manager

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replace Franklin. Morgan now has five managers.

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Roll & Ross fired, replaced by Vanguard internal

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Husic fired

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director since 1993, reportedly had between $50,001 and $100,000 invest- ed in Morgan Growth at the end of 2012, but apparently sold those shares sometime in 2013. The problem, as I’ve noted many times, is that Morgan Growth suffers from too many portfolio managers all acting independently. The current roster of five different investment firms and nine different named portfolio manag- ers is just too messy. If indeed all nine

CORRELATION Dogs and Cats Living Together

Not Unusual for Stocks and Bonds to Gain Ground Simultaneously

3-Month Rolling Returns

6-Month Rolling Returns

12-Month Rolling Returns

Percent of the Time

Both Positive

57% 14% 22%

61% 12% 23%

71%

500 Index Positive / Total Bond Market Negative 500 Index Negative / Total Bond Market Positive

8%

21%

Both Negative

7%

3%

0%

Time frame: 12/31/86–5/31/14; covers 327 rolling 3-month periods, 324 rolling 6-month periods, and 318 rolling 12-month periods.

breaks out the percentage of time the two funds moved higher or lower simul- taneously or moved in opposite direc- tions over several rolling time frames. The first takeaway is that more often than not (roughly 60%–70% of the time)

scratching their heads—but should it really be all that surprising? The short answer is, “No.” The table above considers rolling returns for 500 Index and Total Bond Market funds since the end of 1986. It

14 • Fund Family Shareholder Association

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