(PUB) Investing 2015

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12 • Fund Family Shareholder Association
over time. But to paraphrase Livermore,
it wasn’t my trading that created the
long-term track record you see, but
my buying and sitting, with top-notch
managers doing the heavy lifting. In
words longtime FFSA members will
surely be familiar with, I believe in
buying the manager, not the fund. This
isn’t to say I don’t make trades in the
portfolios (I have), or that I won’t in
the future (I will), but it isn’t trading
that’s carried the day.
Another way to think of sitting rath-
er than trading is to go with a base-
ball metaphor. Rather than swinging at
every ball that comes across the plate, I
wait for the right pitch. Warren Buffett
has described investing as playing base-
ball without a called strike. In his anal-
ogy, stock prices are like pitches, and
you can let them pass you by all day,
every day without being called out—
you can wait for your perfect pitch.
While Buffett was talking about indi-
vidual stocks and individual companies,
you can certainly apply the lesson to
investing with mutual fund managers. No
one says you have to buy every manager
out there, and you certainly wouldn’t
want to. You and I can be selective and
wait for the right manager to come along
before investing. (Vanguard seems to
take a different tack, putting more and
more managers onto many of its funds,
diluting the best ideas with globs of bad
ones and, for the most part, striking out.
Maybe the firm should think about sit-
ting still and taking fewer swings.)
Partnering with a few select manag-
ers and then having the discipline to
sit on our hands and spend time in the
markets has been a successful strategy
for you and me in the long run. It is a
formula I’ll continue to follow.
Before delving into those managers
and funds that I expect will continue
to deliver for all of us, let me say right
up front that many of the funds in the
Models (as well as the alternatives that
I’ll mention below) make up the bulk
of my investable net worth—I defi-
nitely eat my own cooking. Jeff is also
invested in these funds and with these
managers. He eats the cooking as well.
FOCUS FROM PAGE 1 >
And we are quite satisfied with the
meals we’ve prepared.
Additionally, I should note that ever
since this newsletter’s first issue in
January 1991, I’ve kept my Model picks
focused exclusively on Vanguard’s
funds. While I’ve offered alternatives,
the Models remain Vanguard-only. And
when a fund has closed, I’ve kept it in
the Models that already owned it, but
haven’t added it to any of the others if
you, the Vanguard investor, couldn’t fol-
low that lead. Yes, I would prefer to put
the PRIMECAP Odyssey funds into my
Models, but I haven’t, because I know
many of you want all Vanguard, all the
time. So be it. Let’s go over the funds
and managers that make up the Models.
Capital Opportunity
The last time I wrote a Model
Portfolio Funds Focus in October
2012, Capital Opportunity was com-
ing off a tough stretch, returning 8.4%
a year over the prior three years, lag-
ging behind 500 Index’s 13.1% annual
return. My advice at the time: “I do not
believe the PRIMECAP Management
team has lost its mojo…If you already
own Capital Opportunity and your port-
folio is underweight large-cap growth
stocks, I’d look to add to this position,
knowing that the PRIMECAP team has
consistently followed periods of under-
performance with periods of strong
outperformance.”
Well, I hope you followed that
advice, as Capital Opportunity returned
78.3% versus 500 Index’s gain of
49.9% from the end of September 2012
through the end of 2014.
The PRIMECAP Management team
is among the best in the business—not
just in Vanguard’s stable. As I’ve dis-
cussed in the past, all managers—lousy,
mediocre and great alike—underper-
form at some point. Fortunately, the
PRIMECAP team’s periods of outperfor-
mance have more than made up for the
inevitable periods of underperformance.
The PRIMECAP team practices
growth-at-a-reasonable-price, or GARP,
investing. The managers search for tri-
ple-play companies that can grow earn-
ings at a better-than-market rate, can be
more profitable, and can be purchased
at the right price. Unlike most growth
managers, they refuse to pay high prices
for those companies’ stocks. So they
wait. Also unlike other growth managers
who constantly turn over their portfolios
looking for growth, the PRIMECAP
team is patient, often holding stocks
for years and years. The team is fairly
unique, as each manager takes a slice
of the portfolio and invests as he sees
fit. Though there is no collaboration on
holdings, per se, several managers may
find value in the same stocks.
The resulting portfolio often looks
nothing like the broad stock market.
Capital Opportunity typically holds 130
stocks or so, with the top 10 positions
soaking up about a third of assets.
Health care and technology play a
big role—combined, the two sectors
account for two-thirds of the portfo-
lio. Clearly the PRIMECAP managers
invest with conviction.
My only real disappointment with
Capital Opportunity is that it has out-
grown its original objective. What was
once a standout fund investing in small
to mid-sized companies is now a solid
fund investing in mid-sized and large
companies.
I have long advocated that inves-
tors switch to the private-label Odyssey
funds. However, PRIMECAP Odyssey
Aggressive Growth (POAGX)—the
Model Portfolios Over Two Decades and Counting
5-year 10-year 20-year Since Inception
Growth Model 91.7% (13.9%) 130.5% (8.7%) 893.6% (12.2%) 1,479.8% (12.2%)
Conservative Growth Model 85.3% (13.1%) 117.02% (8.1%) 601.7% (10.2%) 993.2% (10.5%)
Income Model 71.6% (11.4%) 93.6% (6.8%) 451.5% (8.9%) 684.4% (9.0%)
Growth Index Model* 96.7% (14.5%) 126.9% (8.5%) — 556.0% (9.9%)
500 Index 103.6% (15.3%) 107.1% (7.6%) 543.1% (9.8%) 899.7% (10.1%)
Total Bond Market 23.1% (4.2%) 56.4% (4.6%) 220.0% (6.0%) 321.8% (6.2%)
Note: Table shows cumulative and annualized (in parentheses) total returns over the periods listed through 12/31/14. I’ve compared returns to
500 Index rather than Total Stock Market since the latter did not exist at the time of the Models’ 1991 inception. *Model inception 3/95.