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The Independent Adviser for Vanguard Investors • March 2015 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
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gained 5.5% on the backs of record
highs in the U.K. and Germany and big
gains in Japan and Brazil.
Bond investors, on the other hand,
gave back with the right hand what
they’d received with the left. Long-
Term Treasury’s 5.7% loss was its
fifth-worst monthly drop since its May
1986 inception, which seems appropri-
ate, given that in January, the fund’s
9.0% gain was its third-best ever. The
fund is up 2.8% for the year compared
to Total Bond Market’s 1.2% rise.
Investors should be prepared for
more extreme swings from Long-
Term Treasury. Why? The fund’s
average maturity of 24.7 years is at
the long end of its historical range,
meaning the fund is even more sensi-
tive to changes in interest rates than
usual. Additionally, with an SEC yield
of 2.28% (near a record low for the
fund), there is not much income to
dampen the changes in price to the
downside.
Meanwhile, Vanguard decided
to up its game in the overseas mar-
kets by ratcheting up allocations to
Total International Stock and Total
International Bond in its various
funds-of-funds. At the same time, it
announced institutional shares of its
Target Retirement funds, which should
launch in Q2 with expense ratios of just
0.10%, versus 0.16% to 0.18% for the
current Target funds. The new share
class doesn’t fully address the ques-
tion I posed years ago—namely, why
Vanguard didn’t use its cheapest share
classes in all of its funds-of-funds,
which are staples in the 401(k) indus-
try—but it’s a start. The benefits of
should invest before or during retire-
ment.
Finally, Vanguard filed registration
papers at month-end for an Alternative
Strategies fund, which it plans to open
in late May.
Alternative Strategies has the option
of using long-short strategies, event-
driven investing, strategies to attempt to
capture mispricing in the bond markets,
and commodity contracts and curren-
cies. Fund manager Michael Roach, a
member of Vanguard’s quant team, is
expected to use leverage to amplify the
investments in the fund.
But before you get all hot about
Vanguard’s entry into an area it has
often critiqued as inappropriate for most
individual investors, recognize that (a)
the fund will have a $250,000 minimum,
which means it will be out of range
for most individual investors, and (b)
it’s being launched primarily for use
by Managed Payout, which used to
invest in commodities through a spe-
cial internal fund but recently has used
the PowerShares DB Commodity Index
Tracking Fund (ticker: DBC), and long-
short strategies through Market Neutral.
I would expect that sometime after
its launch, Vanguard will remove
the Market Neutral allocation from
Managed Payout. As of Jan. 31,
Managed Payout’s 9.9% allocation to
the long-short fund represents $155
million, or a little less than half the
$344 million in assets invested in
Market Neutral. It wouldn’t surprise
me in the least to see Vanguard shut-
ter that fund down the road. Expenses
in the Alternative Strategies fund are
expected to run 1.10%, which is lower
than the current 1.60% expense ratio on
Market Neutral. n
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these lower expenses will only accrue
to the largest retirement plans—those
with $100 million in assets or more.
While Vanguard focused on these
lower-expense funds, the much big-
ger story was the fact that Vanguard’s
investment management committee has
decided to boost exposure to foreign
stocks to 40% of equity assets. While
I believe an allocation to foreign equi-
ties is, indeed, a good idea, a 40%
slice is a big one, and well beyond
what Vanguard has long discussed
in its public pronouncements. That
said, Vanguard could be slowly mov-
ing towards a commitment to the near
50/50 allocation of Total World Stock
Index, a move that would be in keeping
with its “efficient market” mantra, but
one that I think would be too heavily
exposed to the issues of non-dollar cur-
rency moves.
The change also marks the fourth
reallocation of assets since the Target
funds opened in 2003, suggesting that,
like its competitors, Vanguard has dis-
covered glide paths seem simple on
paper, but there is no single “right”
answer to the question of how one
Moving Targets
0%
10%
20%
30%
40%
50%
60%
70%
80%
2003 2006* 2010 2013 2015
US Stock
Foreign Stock
US Bond
Foreign Bond
* Emerging Markets added to foreign allocation