(PUB) Investing 2015

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6 • Fund Family Shareholder Association
The largest position is just over 4%, which is a U.S. stock, Royal
Caribbean. The next largest is 3.5%. We have the ability to run the larg-
est positions up to around 6%, but we’ve never gotten there. And Royal
Caribbean is only as large as 4% because the stock rose 75% last year.
It was one of our most successful investments and we just let it run.
How big is the “incubator” in your portfolio?
About 40 stocks make up 20% of the portfolio. Typically these are our
higher risk, higher reward stocks where the future does have uncertainty,
and they could go very right, or they could go very wrong. But we think
you make a lot more money if they go right than you lose if they go
wrong—asymmetric returns. You could make 300% return or you could
lose 70% of your initial investment, but that is very attractive odds in a
portfolio context.
How do you decide when a company is just suffering a tempo-
rary setback rather than a permanent change in fortune?
That’s one of the most difficult things to do. You have to do it by
looking at each company afresh on a regular basis—not too frequently,
but certainly an annual basis and saying, “From here, do we still expect
that above-average growth?” Last year, we reviewed the upside for just
about every stock in the portfolio over a succession of meetings with a
number of colleagues, and those that didn’t meet [our] hurdle typically
have been sold or are in the process of being sold. We don’t hold onto
things out of loyalty. We hold onto them because we think we are going
to make money.
The danger is that if we have held something for 10 years and have
a cozy relationship with the [company], we might be a little bit slow to
react to a deterioration in management or strategy or market position.
But being slow to react is often the right thing to do. We think you make
more mistakes by being too quick to react.
Let’s talk about Europe for a bit. Many of the companies you own in
Europe don’t rely on local economies for the bulk of demand. But do
investors view them with an eye to European trade anyway?
We have very, very few European-listed companies that are exposed
to European demand. Most are exporting from Europe or are global com-
panies that just happen to be headquartered there.
In fact, we are beginning to wonder now, six years into an economic
downturn, after the European banks have been recapitalized a number
of times, after all the efforts that governments have made, whether
there may be signs of things getting better at a domestic level, and
whether we should actually try and consciously find some exposures
to an improved European economy. Within Europe, not only are we
not exposed to domestic Europe, we are also not very exposed to the
euro zone. Most of our European exposure is to companies based in
Scandinavia or in Switzerland, which are not part of the euro. But again,
if the euro is going to be a weak currency, that is going to help euro-
based exporters, and it may be that there are some euro-based compa-
nies that we should be adding to the portfolio.
In terms of Greece and the “Grexit,” as they call it here, I think it is
an irrelevance. It may happen and it may not happen. I don’t think the
Greeks are helping themselves at all. We have no exposure to the Greek
stock market. If anything, it would probably be helpful to the euro to
I’VE LONG UNDERSTOOD why
Vanguard adds manager after manager
to many of its funds. It doesn’t want to
shut the funds down as cash flows in,
and it likes the idea that as the funds’
portfolios grow in size, they become
more index-like, which means they’ll
never fall too far down in the rankings.
Explorer and Morgan Growth are the
poster children for this “strategy.”
What I don’t understand is why
Vanguard insists on fudging the data to
make a point (one which is invalid in my
opinion) that funds run by lots and lots
of different portfolio management teams
are strong performers. They aren’t.
Vanguard’s newsletter, In The
Vanguard, had the latest example, with
an article titled “For active stock funds,
many heads can be better than one,”
which claims, “All 18 of our multi-
manager equity funds with a minimum
ten-year track record outpaced the aver-
age annual return of their peer groups
over the decade ended September 30.”
First off, this is hogwash. Try as I
might, I couldn’t find 18 multi-man-
ager funds (equity or not) with 10-year
records. Why? Because there aren’t
18. There are 18 multi-manager funds
(17 are equity funds and one is a bond
fund), but only eight have been multi-
managed for the past decade.
Vanguard acknowledged that I was
correct, and a week or so later replaced
the offending article with a corrected
one.
But second, and more importantly,
Vanguard’s use of peer groups as a
metric for comparison is simply dis-
ingenuous, particularly in the age of
indexing and ETFs. It’s a given, at
least in my book, that with the super-
low operating expenses for which
Vanguard is famous, the headwind for
non-Vanguard peers puts these manag-
ers at a disadvantage from the get-go.
If Vanguard picks good managers (and
sometimes it does) then beating peers
is nice, but it’s not the metric share-
holders should be concerned with—it’s
benchmarks. If a fund can’t beat its
benchmark, then why invest in it? Buy
the benchmark in the form of an index
fund or ETF.
I took the helm and did a little
navigating through the data myself.
You can take a look at the table on page
7. In it, I’ve listed the 10-year perfor-
mance not just through September, but
also through December. Why? Well, I
couldn’t understand why a story that
was being published in late January or
early February wouldn’t bring the data
up to the most recent quarter.
What you’ll see when you compare
DATA MINING
When Vanguard Fudges on Performance
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