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The Independent Adviser for Vanguard Investors
•
March 2015
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7
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800-211-7641
know that the weakest members could be expelled. The issues are politi-
cal, not economic.
Does the strength of the dollar—and there seems to be a strong
consensus it’s going to continue to strengthen—impact your
thinking and management of the portfolio?
It has a little. We’ve had a view over the last 18 months that the U.S.
was likely to be the strongest of the developed market economies and the
first place to see recovery. We have been increasing exposure to the U.S.
market, to the dollar and particularly to the domestic U.S. economy. We
haven’t gone as far as we could have gone or indeed should have gone.
Certainly that was one of the handicaps to performance for us last year.
I think I would agree with the consensus that the dollar looks well
underpinned and the fundamentals remain firmly in its favor. That means
one would tend to look for new ideas in domestic U.S. companies that
are not exposed to import competition. And one would tend to steer
away from exporters from the U.S. because they are going to have a ris-
ing cost base in dollars and they are going to be competing with cheap
yen or cheap Korean won or cheap euros.
Last time we spoke, you were window shopping in the emerging
markets. How is your shopping cart looking?
We are still window shopping, and we’ve probably saved ourselves some
money by not actually going into the shop. Over the last year, we’ve been
net sellers of emerging markets companies. We haven’t really found much
to buy in emerging markets. The one market where I wish we’d shown
more urgency and done something more was in India. It was just about the
strongest-performing major markets last year. We were enthusiastic about
everything that was happening, but we were too busy window shopping,
and we didn’t go into the shop and come out with something in our bag.
Investors, pundits and even Jack Bogle have been questioning
whether U.S. investors need foreign stocks at all. Why own for-
eign stocks at all?
I haven’t been asked that till now. The big influence in recent years
has been currency rather than corporate performance. We made similar
nominal returns in some European stocks or Asian stocks, but the cur-
rency has gone against them. Maybe the dollar is now getting to heights
from which it could in five year’s time be weaker.
Also, U.S. listed corporations are significantly more highly valued than
their international peers and competitors. So you get less bang for your
buck if invested in the U.S.
You may say that you get better corporate governance and more trans-
parency and higher quality of company—and I wouldn’t argue with any
of those particularly—but there is a premium attached to U.S. corpora-
tions. You can put all your money into one of the most expensive cur-
rencies and stock markets, but it’s quite easy to envision circumstances
where that could work against you. Just because it’s worked for you over
the last four years, that might well change at some point.
The other helicopter view is there are twice as many companies out-
side America as there are inside. There is more choice. And that suggests
you can add value through picking the very best international companies.
Well, thank you for your insights, Charles.
each fund to its benchmark is that just
two of the eight equity funds which
have been multi-managed for the 10
years through September 2014 actually
outperformed their benchmarks. That’s
25%. And in the 10 years through
December 2014, just one fund out of
those eight was able to outperform.
That’s 12.5%.
The bottom line is that investors
in most of Vanguard’s multi-managed
funds would have been better off in an
index fund or ETF, or finding an active
manager captaining another mutual
fund ship over the past 10 years. They
also could have invested in the
Growth
Model Portfolio
, which outperformed
every one of these eight funds over
both 10-year periods mentioned.
By the way, the one fund that beat its
benchmark over both 10-year periods
cited above:
International Growth
, a
fund that has been a component of the
Model Portfolios
for years.
You can find good active manage-
ment and you can build portfolios
of active managers that will beat the
indexes. You and I have even done it
at Vanguard, as the performance of the
Model Portfolios
more than illustrates.
But you won’t do it by larding your
Matching Multiple Managers to Benchmarks
Multi-Managed for
10 Years Through 9/30/14
Sep-14 Dec-14 Benchmark
Sep-14 Dec-14
Equity Income
8.8% 8.3% FTSE High Dividend Yield Index*
9.0% 8.4%
Explorer
9.0% 8.2% Russell 2500 Growth Index
10.1% 9.4%
International Growth
7.9% 6.2% MSCI All Country World Index ex USA 7.3% 5.4%
International Value
7.1% 5.2% MSCI All Country World Index ex USA 7.3% 5.4%
Morgan Growth
8.5% 7.9% Russell 3000 Growth Index
9.0% 8.5%
U.S. Growth
8.1% 7.7% Russell 1000 Growth Index
8.9% 8.5%
Windsor
7.6% 6.9% Russell 1000 Value Index
7.8% 7.3%
Windsor II
7.9% 7.2% Russell 1000 Value Index
7.8% 7.3%
Multi-Managed for Less Than
10 Years
Capital Value
8.9% 7.4% Russell 3000 Value Index
7.8% 7.3%
Emerging Mkts. Select Stock
N.A.
N.A. FTSE Emerging Index
11.2% 9.0%
Energy
10.8% 8.1% MSCI ACWI Energy Index
8.7% 6.0%
Explorer Value
N.A.
N.A. Russell 2500 Value Index
8.7% 7.9%
Global Equity
7.7% 6.3% MSCI All Country World Index
7.6% 6.4%
Growth & Income
7.4% 7.0% S&P 500 Index
8.1% 7.7%
International Explorer
8.9% 6.6% S&P EPAC SmallCap Index
8.8% 6.9%
Long-Term Investment-Grade 7.0% 7.2% Barclays US Long Credit A or Better Idx.
6.4% 6.6%
MidCap Growth
10.6% 9.7% Russell MidCap Growth Index
10.2% 9.4%
Selected Value
10.2% 9.3% Russell MidCap Value Index
10.2% 9.4%
*As the FTSE Index is less than 10 years old, the performance here uses the Russell 1000 Value index through July 2007, which is how
Vanguard measures the fund as well. All returns are annualized over the 10 years through the date listed.
portfolio up with a soup of multi-man-
aged funds with dozens of chefs in the
kitchen, no matter how Vanguard tries
to cook the numbers.
n