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The Independent Adviser for Vanguard Investors • February 2015 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
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about the time many investors have
begun to write off the benefits of diver-
sification that I’ve been preaching for
years and wrote to you about in last
month’s newsletter.
That being said, the story from
Europe continues to confound, as the
European Central Bank launched a
60 billion euro per month quantitative
easing program, while Greece took a
step in the other direction, voting in
a leftist government that throws into
question the durability of the EU pact.
European Index gained 0.4% during
January’s ups and downs, as Germany’s
market hit several record highs before
ending the month up 9.1%.
The picture in the U.S. isn’t entirely
rosy, of course. Durable goods orders
were weak, and some companies are
already feeling the negative impact of
a strong dollar on exports and earnings.
The initial read on fourth-quarter GDP
indicates our economy grew at a 2.6%
pace in the final three months of 2014,
and 2.4% over the course of the entire
year. That’s not China-like growth, but
it is an improvement over the pace of
the past few years.
The Fed remains “patient,” and my
initial estimate that they’d wait until
at least midyear to hike interest rates
is probably even a bit aggressive now,
given how low inflation is and how
strong the dollar is. I think there has
to be at least some concern on the
part of the Fed governors that hiking
the short rate could further strengthen
the dollar and harm our export growth
as well as profits earned overseas for
dollar-based companies. So, even if
the Fed does give the markets one rate
low fees with volume. But that hasn’t
happened at these two funds. Explorer
Value’s three management firms split
just $903,000 in fees in the most recent
fiscal year. Emerging Markets Select
Stocks’ four management groups took
home a total $1.55 million—chicken-
feed for a money manager. Consider
that over at PRIMECAP Core,
the last fund launched with a non-
Vanguard manager prior to Explorer
Value’s debut, the team took home
$19.8 million in its most recent fis-
cal year despite having closed to new
investors in August 2009. Of course,
performance might have something to
do with that.
Speaking of which, the PRIMECAP
team took home the Manager of the
Year award from fund rater Morningstar
in January. Vanguard crowed about it
online, but in a blog post, Vanguard
senior analyst Chris Phillips took great
pains to note that relying on fund rat-
ings like Morningstar’s “stars” is, as he
puts it, an investing “FAIL.”
Youand I partneredwithPRIMECAP
long before Morningstar figured out
that the team was one of the best on
the planet—and yes, a great example
of active management putting indexes
to shame—and we’ve benefited from
their excellent stock picking over
more than two decades. And that’s no
“fail.”
Finally, Vanguard’s investment team
must be optimistic about interest rates.
They’ve boosted Managed Payout’s
monthly distribution to $0.0589 from
$0.0555 for 2015. Last year most of
the fund’s 3.5% distributed income was
real, rather than a return of capital. But
that still doesn’t make the fund a win-
ner. I’d avoid it. n
OPENING FROM PAGE 1 > hike this summer, I wouldn’t take that
as a signal that lots more will quickly
follow.
February is when I expect to see
Vanguard launch Ultra-Short-Term
Bond, which Jeff and I wrote to you
about in the December issue. While
the fund’s value will fluctuate, we still
think it could still serve as a money-
market-like substitute for cash that you
don’t need next week or next month.
In the meantime, Vanguard contin-
ues to confound and confuse when it
comes to active management.
After almost five years for Explorer
Value and four for Emerging Markets
Select Stock, the two funds have
grown to just $309 million and $278
million in assets, respectively—a pret-
ty paltry showing, even for a couple
of actively managed funds. Vanguard
says they are now going to be avail-
able to financial advisers who want to
put them into clients’ portfolios. But
why were the funds limited in the first
place? According to Vanguard, “The
funds had previously been limited to
retail investors and certain institu-
tional investors to mitigate capacity
concerns.” What capacity concerns?
One fund has three separate portfolio
management teams, and the other has
four. Did anyone really think these
funds were going to collect billions in
new money, or did hope simply spring
eternal?
Portfolio managers often work with
Vanguard, despite being paid tiny
fees (on a percentage basis), because
Vanguard’s size and presence generally
means they will see tons of new money
flow into just about anything Vanguard
puts into the marketplace. Portfolio
managers expect to make up for these