(PUB) Vanguard Advisor

active funds more index-like (or worse) over time. As far as I’m concerned, the direc- tor with the best record of the bunch is Peter Volanakis, former president and CEO of Corning. He owns a lot of Vanguard funds, meaning his for- tunes, to a greater or lesser extent, ride alongside fellow shareholders. Volanakis holds positions of $100,000 or more in 21 different funds, and also owns one other fund on top of that. Even Chairman McNabb isn’t keeping pace—he has “over $100,000” posi- tions in 20 funds. On the other end of the scale is André Perold, who despite hav- ing been paid more than $1.6 mil- lion in fees since joining Vanguard’s board in 2004, has only invested in two Vanguard funds, 500 Index and Convertible Securities , and his hold- ings in the convertible fund are in the $10,001 to $50,000 range. Show Us the Money Why the focus on directors and their holdings? According to some at Vanguard, this kind of deep dive into how the directors invest is the stuff of tabloid journalism. It’s no one’s busi- ness but the board members’, they’d say. But is it, really? According to former SEC chairman Arthur Levitt, “Being on a mutual fund board is the most comfortable position in corporate America.” Maybe a little discomfort, and disclosure, is what Vanguard’s >

traction in a fund industry that would rather hide behind the banner of per- sonal privacy than fly the flag of full disclosure. Public companies do it. In fact, they often pay directors and executives more in their own shares than they do in cold, hard cash. Is it too much to ask that directors’ financial interests (and I’m not talking about just their annual fees) be aligned with those of investors in the funds they purport to keep watch over? Again, Peter Volanakis is the kind of director all fund boards should be seek- ing, as his investments in Vanguard funds far exceed the amount he’s been paid in fees. And let’s not for- get Vanguard Chairman Bill McNabb, who hasn’t come close to matching his predecessor Jack Brennan’s holdings

board—and all boards—need. If all of Vanguard’s funds were producing tip-top returns, I’d back off. But they aren’t. And who’s in charge of all that? The directors. As I have argued many times, Vanguard’s directors need to do a bet- ter job of eating their own cooking if we’re to believe they have sharehold- ers’ best interests at the top of their minds. How is it, for instance, that the directors took so long to finally boot AllianceBernstein from U.S. Growth , or Turner Investments from Growth Equity , two woeful dogs of funds that had virtually zero representation in the board’s personal portfolios? Would greater ownership in Windsor II have led to a revamping of the managers there sooner? Or how about those woeful Managed Payout funds? Not a single director owned shares there. Would they have acted sooner to recast the funds if personal money had been at stake? Did the directors take their eyes off the ball? Not being privy to board minutes, I can’t say. But had their own fortunes at least been subject to some of the long periods of underper- formance or horrendous losses these funds produced, maybe they wouldn’t have taken so long to make changes. While we’re on the subject, it’s also time that Vanguard took a leadership position in its industry and paid direc- tors in shares of the funds they oversee, rather than in cash—something I’ve advocated forever, but which gets no

Despite having been paid more than $1.6 million, director André Perold is invested in just two Vanguard funds.

in more than 40 funds. McNabb is a shareholder in just 22. Ask yourself, are Vanguard’s “kings and ministers,” as economist Adam Smith would call them, eating their own cooking, or simply dining on a few funds while serving up the “private people” with nary a nibble? n

EMERGING MARKETS Active Management Wins, So Far

gains, not annualized gains. As I men- tioned, it hasn’t been a great three years. To put it into perspective, Total Stock Market is up 62.4% over the same period. Emerging Market Select Stock’s performance is testimony to good stock- picking on the part of some or all of the managers on the fund, as well as an abil- ity to invest beyond the parameters that constrain the index fund. More on that in a moment.

by Wellington Management’s Cheryl Duckworth) is outperforming the pas- sive Emerging Markets Index . That said, it hasn’t been an easy three years for either fund. First, the good news. As you can see in the first chart on page 15, the active fund has definitely outperformed, with a total gain from inception through June of 9.3% compared to the index fund’s 0.1% loss. Now, those are total

CAN MULTIMANAGEMENT WORK? Most of the time I’m not a believer, but in the case of Emerging Markets Select Stock , the early results are good, and instructive. The fund passed its three-year birthday in mid-June, and so far the combination of four management teams consisting of seven managers (not including the underlying team of global industry analysts managed

14 • Fund Family Shareholder Association

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