(PUB) Vanguard Advisor

“DEAD MONEY.” In March, I told you that despite the 10.2% gain for Precious Metals & Mining during February’s rebound, investing in the fund (or in gold, for that matter) was a mistake. So I was surprised to see Vanguard dancing around the fund’s performance in a recent interview with its former manager, Graham French. Writing that the interview would give “tips on how to avoid fool’s gold,” Vanguard noted that under French’s tenure, from the end of 1996 through 2013, the fund had outperformed 75% of its peers. That’s nothing to sneeze at, and Graham French sounds like a class act. But what Vanguard didn’t men- tion was the fact that even though Precious Metals & Mining outper- formed three-quarters of its peers, its the William Blair fund performed over the 10-year stretch that coincides with the firm’s tenure on U.S. Growth. The results aren’t pretty, and it calls into question just how William Blair— which, by the way, now runs just 12% of the assets in the newly enlarged U.S. Growth—can add lots of value. Take a look at the first chart to the right. In it, I’ve plotted the performance over the past 10 years for U.S. Growth, William Blair Large Cap Growth and the Russell 1000 Growth index, which is the benchmark for both funds. From March 2004 through March 2014, U.S. Growth’s 7.0% annualized return lagged the Russell index’s 7.9% return, and the William Blair fund under- performed both, compounding at just 6.6% per annum. Now, it’s possible that the port- folio William Blair builds for U.S. Growth looks more like their William Blair Growth fund, in which case the 10-year return is a much stronger 8.7%. However, that fund benchmarks against a much broader Russell 3000 Growth index, so it’s really not the right com- METALS Fool’s Gold

U.S. Growth Righted?

WilliamBlair Underperformed

225

1.04

U.S. Growth vs. Growth Idx. U.S. Growth vs. Russell 1000 Growth Idx.

W.B. Large Cap Growth U.S. Growth Russell 1000 Growth

200

1.03

175

1.02

150

1.01

1.00

125

0.99

100

0.98

75

0.97

50

3/04

3/05

3/06

3/07

3/08

3/09

3/10

3/11

3/12

3/13

3/14

9/10

3/11

9/11

3/12

9/12

3/13

9/13

3/14

parison. And neither Golan or Ricci are managers on the Growth fund, so I’ll stick with my comparison to the former fund. So what’s McNabb talking about? I’m not sure. I’m also not sure that U.S. Growth has necessarily emerged from its “challenging stretch.” Since firing AllianceBernstein and hir- ing Wellington Management and Delaware Management at the end of 2010’s third quarter, relative perfor- mance has improved a bit. From that

point through the end of March 2014, U.S. Growth gained 81.3% compared to 78.6% for the Russell 1000 Growth index and 77.4% for Growth Index . But that’s a pretty short period to mea- sure, and it certainly doesn’t account for the fact that U.S. Growth has been reconfigured again through the merg- er and addition of Growth Equity ’s managers. I’m not too sanguine about the new U.S. Growth. You shouldn’t be, either. n

And, as you’ll see in the chart to the left, Precious Metals & Mining couldn’t come close to performing alongside some of my favorite active funds, nor could it keep up with my Model Portfolios over the 17-year period. (The chart shows total returns for the full period.) In fact, had you and I owned a piece of the fund in our portfolios over that time, our performance would have been worse. Timing our entry and exit would have been impossible given the fund’s volatility, so those who think we might have caught an upside year like 2009, when it gained 76.5%, ignore the equal possibility of having money there in 2008, when it lost 56.0%. Vanguard got it right when they said they would offer tips on avoiding fool’s gold, but they didn’t give the best tip of all, which is to avoid this fund. n

Prec. Metals&Mining Lagged

Health Care Capital Opportunity Growth Model PRIMECAP Selected Value Cons. Growth Model REIT Index Growth Index Model Windsor II Total Stock Market Idx. 500 Index Dividend Growth Income Model Emerging Markets Index International Growth High-Yield Corporate Total Bond Market Index Total International Index Prec. Metals & Mining Prime Money Market

0% 300% 600% 900%

Note: Chart covers period from 12/31/1996 through 12/31/2013.

overall performance was horrible, and didn’t even match the returns from Total Bond Market Index , a well- known and much more stable portfolio “diversifier.”

The Independent Adviser for Vanguard Investors • May 2014 • 5

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