(PUB) Vanguard Advisor

First page Previous page 75 Next page Last page

I’ll stay the course for the moment, but I’ve got my eyes on this one, and if this kitchen’s soup begins to go bland, I’ll let you know. n

stocks or so Barrow ran with original- ly) is disheartening, as it means Pzena probably has little to no overlap with the stocks already in Selected Value.

at that point yet. Pzena has so far only picked up a small portion of the port- folio. But a jump to 120 stocks from 67 (which is a massive leap from the 40

TRY TO ANSWER THIS QUESTION without jumping ahead to see the answer: The two charts shown here represent the industry/sector alloca- tions for two funds benchmarked to the exact same index. One fund’s turnover over the past five years has averaged 13%, while the other fund’s average turnover has been 17%. What can you say about these two funds? Is one active and the other passive? Are they both index funds or both active funds? Pretty confusing, right? One fund’s portfolio allocations are all jiggly-jag- gly while the other’s look fairly smooth over time. Let me give you the answer to the question and then let’s discuss it. Fund A is an index fund, Dividend Appreciation Index . Fund B is an actively managed fund, Dividend Growth . Both are benchmarked to the same index. While turnover is pretty similar, the jagged shifts in allocations in the index fund, Fund A, look more like the work of an active hand versus the more steady allocations in the active fund, Fund B. Notice, for instance, the disappearance of telecom stocks around the end of 2008 and the leap in alloca- tion to energy stocks in 2010 and 2011 in Fund A. It just doesn’t make sense, initially, that the allocations in an index fund would bounce around the way they have in Dividend Appreciation Index, particularly when you compare it to the relatively steady-state allocations in Dividend Growth, until you consid- er that the index fund is held to a very particular rule set that requires it to dump stocks of companies that haven’t consecutively raised their dividends in each of the past 10 years. That sounds INDEXING Smooth Sailing?

Fund A: Annual Reallocation

Fund B: SmoothManagement

100%

Utilities Telecom

Materials Info Tech Industrials Health Care Financials Energy

80%

60%

Consumer Stap. Consumer Disc.

40%

20%

2/07

2/08

2/09

2/10

2/11

2/12

2/13

2/14

2/07

2/08

2/09

2/10

2/11

2/12

2/13

2/14

pretty “active” to me, since humans, not computers, write those rule sets. What got me started on this bit of anal- ysis were some comments in Vanguard Chairman Bill McNabb’s recent letter to Dividend Appreciation Index’s share- holders. He noted the fund benchmark’s rule set, and also mentioned that sector allocations could and would differ from the broad stock market as a result. What he didn’t mention was that the changes in the index composition can be very, very abrupt, something that seems anathema to the indexing dogma that pervades Vanguard. But since changes are made at year-end and index-tracking funds must make their changes right away to stay in sync, that’s exactly what happens at Dividend Appreciation Index. Meanwhile, the active portfolio management that is derided so often by Vanguard actually looks a lot less active in the hands of Don Kilbride at Wellington Management. You have to ask why the index fund’s average turn- over is only a few percentage points away from Kilbride’s. Sounds pretty active to me. And what does all that activity get you? Not a lot. In fact, if you read the

Dividend Growth vs. the Index

1.16 rising line = Dividend Growth outperforms Dividend Appreciation Index

1.12

1.08

1.04

1.00

0.96

2/06

2/07

2/08

2/09

2/10

2/11

2/12

2/13

2/14

Interview with Don in last month’s issue, you probably know that the one area of the market where he thinks the most long-term value currently resides is in the energy sector. Since the end of 2013, the index fund’s allocation to energy stocks has remained stagnant. Kilbride, on the other hand, has a higher allocation today than he did at year-end. Maybe it’s stock picking and maybe it’s deliberate allocation of cash; either way, it’s the kind of active management that has stood the fund head and shoul- ders over its index cousin. n

The Independent Adviser for Vanguard Investors • May 2014 • 7

FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641

Made with FlippingBook