(PUB) Investing 2015

The Independent Adviser for Vanguard Investors

•

March 2015

•

FOR CUSTOMER SERVICE, PLEASE CALL

800-211-7641

smaller, nimbler version of Capital

Opportunity—is now closed to new

investors as well. If you own either

Capital Opportunity or

PRIMECAP

Odyssey Aggressive Growth

, stick with

them. If you’re looking to make your

first investment with the PRIMECAP

team, consider

PRIMECAP Odyssey

Growth

(POGRX).

Dividend Appreciation ETF

I recommend this ETF, which tracks

the NASDAQ U.S. Dividend Achievers

Select Index, in the

Growth Index

Model Portfolio

as a decent substi-

tute for

Dividend Growth

. (Dividend

Growth’s comparative benchmark is the

same index this fund mimics.) If you

are an indexer, this ETF gives exposure

to a set of large-cap companies with

strong balance sheets and a proven

record of growing dividends. But for

my money, I prefer the active hand of

Don Kilbride on Dividend Growth.

That said, after outpacing the broad

market in 2011, large-cap, dividend-

rich U.S. stocks have lagged over the

past three calendar years. During that

stretch,

Dividend Appreciation ETF

returned 16.6% a year—not bad in

absolute terms, but still 3.7% behind

Total Stock Market

’s 20.3% annual

return. Trailing by 3.7% a year starts

to add up, but remember that the large,

stable, dividend-growing companies

held in this portfolio earn their keep

when the stock market stumbles.

Dividend Growth

As I just mentioned, the waters

where Wellington’s Don Kilbride fishes

(large-cap dividend growers) have been

out of favor with investors for the past

three years. Through the end of 2014,

Dividend Growth’s 17.5% annualized

return trailed Total Stock Market’s

20.3% pace—but it is nearly a full per-

cent higher than Dividend Appreciation

ETF’s 16.6% gain.

In contrast to Dividend Appreciation

ETF, Kilbride has the flexibility to

invest overseas, an option he has uti-

lized in the past, putting as much as

15% of the fund’s assets in foreign

stocks. Additionally, he runs a tighter

ship here compared to the index fund,

typically holding 50 or so stocks, while

the index fund holds more than three

times that number. This more con-

centrated portfolio allows Kilbride’s

stock picks to have more impact on the

fund—for better or worse. Fortunately,

it has tended to be for the better.

This fund is one that checks the

boxes that typically make for a win-

ner—a single manager, a concentrated

portfolio, a strong and proven track

record, a sensible strategy and plenty

of resources in support. So long as this

skipper remains at the helm, I’ll stay

aboard for the long voyage.

Health Care

I don’t think I’ll ever get sick of

investing in

Health Care

, which

has been a component of my

Model

Portfolios

for over 15 years. The fund

has been on a tear—through the end

of 2014, Health Care returned 28.4%

a year over the prior three years and

20.2% over the past five. By compari-

son, 500 Index has generated annual

returns of 20.2% and 15.3% over the

same periods.

Of course, even Health Care investors

have to take their medicine from time to

time, and I recommend tempering return

expectations going forward—gains of

nearly 30% a year can’t be maintained

indefinitely. That being said, I still believe

it makes sense to overweight health care

in our portfolios. Demographics, innova-

tion and global demand all support the

argument for more—not less—exposure

to health care.

And let’s not forget that while the

“growth” side of the sector (think bio-

techs and medical device makers) has

driven performance, health care can at

times be a defensive sector, with a stel-

lar long-term record of outperforming

the market with less risk, particularly

in downdrafts—not a bad combination.

In our

Models

we have an addi-

tional dose of health care, since the

PRIMECAP team is also overweight

the sector; however, given the role it

will undoubtedly play in the future, the

historic risk and reward dynamics of

health care, and the skills of both the

Wellington and PRIMECAP teams, I am

comfortable with an outsized position.

Health Care ETF

If you’re trying to match the success

of Wellington’s health care team, you’ll

have a tough time doing it with Health

Care ETF. But, as it’s all we’ve got, this

ETF is at least a low-cost option for

those looking to index a piece of the

health care sector.

For my money, I prefer partnering

with the Wellington team. But if you

insist on indexing even if it underper-

forms, this is the only option atVanguard.

High-Yield Corporate

It’s been more than three years

since we traded into the market for

high-yield (or “junk”) bonds in the

Conservative Growth

and

Income

Models

in September 2011. And it’s

been a profitable trade for us, with

High-Yield Corporate

up 32.6%

through the end of 2014 compared to

Total Bond Market

’s 8.5% return.

Yes, the high-yield bond market

has come under pressure the past few

months, as dramatically lower oil prices

have driven investors to question the

ability of some leveraged energy-relat-

ed companies to pay off their debts.

Wellington’s Michael Hong takes a more

conservative approach to the junk bond

space, which has paid off over the past

few months as the fund held up better

than some of its more aggressive peers.

The turmoil created by low oil pric-

es has also created better values. High-

Yield Corporate’s 4.66% SEC yield

isn’t sumptuous, but it’s a big improve-

ment from the all-time month-end low

of 3.85% hit in June 2014, and it is still

a nice pickup over the 2.92% yield on

Intermediate-Term Corporate

or the

1.92% yield on

Total Bond Market

For those who own the fund, if yields

continue to rise (and prices continue to

fall) this could be a position to add to.

In the meantime, I’m happy to earn a

higher yield while allowing Hong to sort

through the winners and losers of lower

oil prices.

Intermediate-Term Investment-

Grade

Historically, Vanguard’s interme-

diate-maturity funds have generated

80% to 90% or so of the return