(PUB) Vanguard Advisor

Opportunity , Selected Value and Dividend Growth .

tage over the open-end index fund. And vice versa . In the table on page 14, I’ve grouped the sibling ETFs and index funds with the ETF listed first. Running down the table you’ll see that sometimes on an after-tax basis the ETF comes out slightly ahead. At other times, it’s the mutual fund. Most impor- tantly, the differences are measured in basis points, or hundredths of a percent. To me, owning an ETF over an index fund, or vice versa , is a toss-up. So, if you hear someone extolling the virtues of a Vanguard ETF over a Vanguard index fund for its tax efficiency, pull this table out. The argument doesn’t hold water. n

doing as well as it appears when taxes are taken into account. A final caveat: For investors in tax-deferred accounts like an IRA, the issue of tax efficiency is large- ly irrelevant . This means that you shouldn’t avoid a fund like Convertible Securities simply because it is tax-inef- ficient; rather, you should look to hold it in your IRA instead of your taxable account if its objectives meet yours. While some funds are better suited for tax-deferred accounts, other funds can be appropriate in either situation. Several of the funds in our Model Portfolios fared very well both before and after taxes, including Capital AS I NOTED LAST MONTH, Vanguard took a step in the right direction in March when it cut one manager from Windsor II ’s roster, but the fund is still too manager-heavy for my tastes. Vanguard announced the firing of co- manager Armstrong Shaw Associates on March 1, dropping the firm in favor of a slightly greater concentration of assets among the fund’s remaining five co-managers. Armstrong Shaw’s 4% portfolio allocation was handed over to Hotchkis & Wiley, which will now run about 11% of the mega-fund. This is a good first step towards returning Windsor II to some form of performance prominence, but it isn’t enough. Vanguard funds with lots and lots of managers simply don’t perform as well as their trimmer counterparts. ( Explorer and Morgan Growth quick- ly come to mind, and U.S. Growth with its new five-team approach is but the latest offender.) Of course, Vanguard’s spin on this change was that it was giving a “bigger role” to the managers at Hotchkis & Wiley. That’s not quite the same as say- ing they are reducing the head count on the fund, or firing a manager for lousy numbers—surprise, surprise. Vanguard continues to claim that multimanage-

What about ETFs? ETFs have long been touted as the most tax-efficient way to invest. However, more than three years ago I showed you some preliminary data to indicate that ETFs might not be any better at keeping taxes at bay than a regular old open-end index fund. In fact, I told you that in some cases the old format was better than the new. Well, with many more years of data now available, I’d say it’s pretty conclu- sive that from an investor’s tax perspec- tive, the ETF has no particular advan-

MANAGERS Windsor II Slims Down

5 Years atWindsor II

JimBarrowSolo vs. Windsor II

0.93 0.94 0.95 0.96 0.97 0.98 0.99 1.00 1.01 1.02 1.03 1.04 1.05

rising line = Windsor II outperforms

1.20

rising line = Div. Value Annuity beats Windsor II

1.15

Sanders Capital hired at WII

Hotchkis and Wiley hired at WII ▼

1.10

▼

1.05

▼ Lazard hired, Equinox and Tukman both fired at WII

▼ Armstrong Shaw fired

▼ Armstrong Shaw hired at WII

1.00

0.95

Windsor II vs. Russell 1000 Value Windsor II vs. Value Index Windsor II vs. 500 Index

0.90

Diversified Value Annuity vs. Windsor II

0.85

3/09

9/09

3/10

9/10

3/11

9/11

3/12

9/12

3/13

9/13

3/14

3/99

3/01

3/03

3/05

3/07

3/09

3/10

3/11

3/12

3/13

3/14

ment works, but the numbers show that it doesn’t. In the chart above, you can see that Windsor II has mostly lagged its Russell 1000 Value Index bogey since March 2009, with just two short bursts of outperformance over the period. Otherwise, it’s been a me-too kind of performer. Meanwhile, Jim Barrow has outper- formedWindsor II, which he runs a piece of, with Diversified Value Annuity , which he manages solo, despite a higher expense ratio (0.65% for the annuity versus 0.36% for Windsor II).

shareholders, one consequence of Vanguard’s move is that it is a crushing blow to Armstrong Shaw, where more than two-thirds of the firm’s assets were the monies managed for Vanguard. At year-end, Armstrong Shaw reported a bit more than $2.7 billion under management. Running about 4% of Windsor II’s $47.4 billion, or $1.9 billion, means that about 70% of the firm’s money is now gone. (I’ve based this data on year-end SEC filings.) The change to Windsor II’s lineup makes the fund more acceptable, but it certainly won’t make it exceptional. But that may be just what Vanguard is aiming for. n

Armstrong Shaw Shrinks While this won’t matter to Vanguard

The Independent Adviser for Vanguard Investors • May 2014 • 15

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