(PUB) Vanguard Advisor

SMALL CAPS ExplorerValue Stays Small

as yet. Remember, Vanguard and the managers determine the benchmark against which they’ll be measured. But investors don’t necessarily use that same benchmark as part of their own criteria when selecting a fund. The fact that Explorer Value has beaten its benchmark todate is fine, but not a suf- ficient reason to buy it. I’mmaintain- ingmy “Hold” rating, with a hope that the active managers will pick up their pace a bit. But I’m not recommending the fund. n

that performance has been mixed. On theonehand, the fundhasoutperformed its Russell 2500 Value Index bogey as well as the age-old SmallCap Value Index . On the other, it hasn’t been able to match the performance of either its growth-oriented big sib, Explorer , or the value-oriented Strategic SmallCap Equity , run byVanguard’s quant team. So, the basic question is, “What’s the value added (pun intended) in buy- ingExplorerValue?” I’mnot sure there is any—or at least it hasn’t shown any

OPEN UP THE TAP, and you expect a rushing flow—not a steady dribble. But a dribble is exactly what Vanguard’s gotten since twisting the handle at ExplorerValue . On April 3, 2013, Vanguard announced it would make Explorer Value available to institutional clients investing directly with Vanguard. As ChairmanBillMcNabb put it, “We are confident that the fund can accommo- date additional assets.” Just one thing: There hasn’t been much to accommodate. Since the fund openedwider, inflowshaveheld steady, and small, with less than$10million in newmoney coming into the fund each month. At the end of February, assets stood at $281 million. Given perfor- mance inMarch, assets probably stood around $284million at quarter’s end. And performance may be the rub here. As you know, I’m no fan of overmanaged mutual funds with port- folios divvied up amongmultipleman- agement companies who often further divide assets among multiple portfolio managers. In Explorer Value’s case, we’re talking about three firms with about equal portions of the portfolio overseen by seven different “named” portfolio managers. That’s a lot of cooks stirring the pot. WhileExplorerValue is still relative- lynew, havingbeenaround for just four years, you can see in the chart below

QUOTABLE Vanguard.comDownloadsof Trouble

I ASKED, ANDYOUSPOKE—loudly. Yes, there are problemswithVanguard’s TurboTax down- loads aswell as continuing problemswith vanguard.com. And yes, those of youwho spoke out are aggravated, to say the least. Not onlyare someof youhaving to resubmit tax returns you’vealready sent in to the IRS, but thereareapparentlyother vanguard.com limitations that are causingheadaches. Onenewone I’ve heardabout is that Vanguard’s computer systemswon’t allow you toassignapower-of-attorney over both taxableand tax-deferredaccounts. According tomy correspondent, “My Flagship rep indi- cates that he’s let the ITdepartment knowabout this, but so far it is still incorrect.” As I have said again and again, the computers at Vanguard are far from perfect. I’ve hadmy own issues of late. So, in all matters electronic, “Trust, but verify.”

QUOTABLE EmergingMarketsExpensive

RICHARD PZENA, head of the eponymous value firm that runs a piece of Windsor , Emerging MarketsSelect Stock and the non-U.S. fund, U.S. Fundamental Value , andwas recently named to SelectedValue , says emergingmarkets are still expensive. According to a report on an investment conferencewhere Pzena spoke, he said that even the stocks that he likes in the emergingmarkets—companies benefiting from the growth of the middle class—haven’t gotten cheap enough, and that he prefers European stocks over those in the emergingmarkets. I’m always impressedwhen amanager can actually say something negative about the sector inwhich he is investing, because somanymanagers simply lay out the bullish case for their funds or strategies nomatterwhichway the valuationwinds are blowing. I should note, by the way, that Pzena himself is not listed as a portfoliomanager on EmergingMarkets Select Stock, but I’m sure his opinions inform some of the discussions at his firm. Since its inception in June 2011, EmergingMarkets Select Stock has outperformed EmergingMarkets Index , gaining 1.4% versus the index fund’s 8.5% loss. Pzena InvestmentManagement runs about one-quarter of the activelymanaged fund’s $250mil- lion in assets.

ExplorerValueVersus...

0.90 0.92 0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08 rising line =E.V.Outperforms

E.V. vs. SmallCapValue Index E.V. vs. Russell 2500Value Index E.V. vs. Explorer E.V. vs. StrategicSmallCap Equity

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The Independent Adviser for Vanguard Investors • April 2014 • 7

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