(PUB) Vanguard Advisor

has more risk in it than most investors recognize, as it is especially susceptible to rising interest rates. You may recall from last month’s letter that Jack Bogle and I are on the same page on this one. Where does that leave investors? For all the correct moves that Ameriks and company have made, the fact remains that the old Managed Payout funds failed to deliver on their original objectives. Additionally, over the past year, on a total return basis, Managed Payout’s 13.0% gain has failed to keep pace with other similarly allocated bal- anced funds, with STAR up 14.1% and Wellington up 14.0%. So while the bar has been lowered for Managed Payout, I remain skeptical that it will be able to clear this hurdle. I definitely wouldn’t buy this reconfig- ured amalgam. n

rate bond-heavy Intermediate-Term Investment-Grade into Total Bond Market is a head-scratcher. Selling out of Intermediate-Term Investment-Grade essentially closes the trade first made into the fund in July 2012. That trade has been posi- tive, once again, for shareholders, with Intermediate-Term Investment-Grade up 4.0% from July 2012 through the end of April 2014. Over the same period, Total Bond Market only gained 0.6%. What leaves me perplexed is that with interest rates near six-month lows, this move increases exposure to the most interest-rate-sensitive bonds out there: Treasury bonds. I have cautioned for some time that Treasurys and other government-backed bonds make up nearly two-thirds of Total Bond Market’s portfolio. This means the fund

The most recent round of chang- es in April was twofold: First, Total International Stock was trimmed to establish a 4.8% position in Emerging Markets Stock . Second, Intermediate- Term Investment-Grade was sold with the proceeds being added to the position in Total Bond Market. In short, these moves increase emerging markets risk while also adding more interest- rate risk. The move to overweight Emerging Markets Stock isn’t one I’m about to make, but it is one that I can under- stand. After lagging developed market peers over the past three years or so, emerging market stocks look relative- ly more attractive. So, if you’re going with a contrarian bet, this is a trade you might make. But the trade out of the corpo-

INTERVIEW > CHARLES PLOWDEN Going for Growth, Globally

winners, you sometimes manage to find them when they are cheap— particularly if you are patient.

CHARLES PLOWDEN, 53, is one of three Baillie Gifford partners tasked with running the 105-year old Edinburgh firm’s Global Alpha strategy, the same strategy put to good use in the approxi- mately one-third of Global Equity ’s portfolio that the team manages. Eschewing a trader’s mentality, Plowden says the only way to build wealth is by buying and holding good growth companies. Jeff DeMaso and I spoke with Charles just last week. Listen in. Charles, I often detect a mention of themes in your writing. Are there some themes that are central to the work you do, and how often do they change? The main themes are that we are long term in our approach. And by long term, we mean five years plus. The second theme is that we are growth investors. All of our investment strategies have a growth bias and a growth focus, and all of our research is aimed at identifying long- term, above-average growth stocks. And what exactly is growth? We are looking for a minimum of double-digit long-term growth in earnings, cash flows, assets or dividends, whatever the measurement, on a five-year plus horizon. We are looking for winning companies. Who doesn’t look for winning companies? I would say an awful lot of value investors don’t look for winning companies but look for cheap companies. And in our view, if you look for cheap, you tend not to find the winners, whereas if you look for the

Give me an example. Three or four years ago, we bought shares in eBay, which was strug- gling. Its core franchise, the auction site, was beginning to lose share to Amazon, and the website was tired and the management was strategi- cally a little confused, and the stock was trading at about 12 times earn- ings. We knew it pretty well, and we saw that it owned this asset called PayPal. On the back of e-commerce, globally, PayPal had a huge opportu- nity. So we bought shares in it at 12 times earnings. Since then the earn- ings quality has improved; management has improved; the quantity of earnings has improved; and the valuation has approximately doubled. So the stock price has risen fourfold in that four-year period since purchase. If you are patient, and have quality and growth, the market about once every 10 years gives you these fantastic opportunities. If you want to buy bargains, you don’t go where everyone else is going, you go where everyone else is leaving. You have to be a bit contrarian. No. The danger if you have offices is you have very good information, but you can’t use that information so easily. The decision makers are the guys that need the information, and the decision makers typically need to be together so that they can, you know, look at each other’s eyes and resolve differences and make a decision. You can’t make deci- sions across four different parts of the world or time zones. So we do huge amounts of traveling, and companies from all around the world will come to Edinburgh if they are coming to Europe. We think that Baillie Gifford meets with over 2,000 companies each year. For a global manager you don’t spend a lot of time with boots on the ground and you don’t have offices around the globe.

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The Independent Adviser for Vanguard Investors • June 2014 • 5

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