(PUB) Investing 2015

•

Fund Family Shareholder Association

www.adviseronline.com

and the yield of their long-maturity

counterparts while exposing investors

to about half the risk. Not a bad trade-

off.

Intermediate-Term Investment-

Grade

focuses on high-quality cor-

porate bonds, and its yield of 2.35%

may not be anything to get excited

about, but it is a decent pickup over the

1.32% yield on

Intermediate-Term

Treasury

For years, I’ve been warning about

the risks of rising interest rates, and I

have so far been wrong. Fortunately,

I’ve also advised that rising rates are

not a reason to abandon bonds. Yes, it

paid to hold long-maturity bonds last

year, as

Long-Term Treasury

’s 25.3%

gain shows, but remember that the risk

side of that coin prevailed in 2013,

when rates increased and Long-Term

Treasury declined 13.0%.

With Vanguard’s long-term bond

funds yielding between 2.28% and

4.14% at month-end, the long-run risk/

reward on longer-maturity bonds does

not look attractive to me. Staying in the

intermediate-maturity range provides

us with some income and protection

against falling stock prices without leav-

ing us too vulnerable in the face of a

rising rate environment.

International Growth

Everyone seems to agree that the

economic and investing picture is better

in the U.S. than it is overseas, and past

performance has reflected that, with

Total Stock Market’s five-year annual-

ized gain of 15.6% through the end of

2014 well ahead of

Total International

Stock

’s 4.3% return. But it has paid to

be diversified over the long run, and

International Growth

provides expo-

sure to both developed and emerging

market stocks.

The teams managing

International

Growth

have feet on the ground in many

countries and have consistently been able

to separate the winners from the los-

ers. International Growth outpaced Total

International Stock in five of the last six

calendar years (2014 was the outlier).

I’m not throwing in the towel on for-

eign stocks, and you shouldn’t either.

Holding only U.S. stocks would have

looked really smart last year (and in

2013, too). But markets are cyclical,

and as sure as the sun will rise tomor-

row, there will come another cycle

when foreign stocks lead the way. (See

the December 2014 newsletter and the

story on page 5 for a deeper dive

into the history of U.S. and foreign

stock performance.) If, like me, you are

beginning to see articles in your local

papers arguing that investors simply

don’t need to own any foreign stocks,

this could be the signal that the turn in

the cycle is fast approaching.

MidCap Index

S&P MidCap 400 ETF

S&P MidCap 400 Growth ETF

S&P MidCap 400 Value ETF

Mid-caps are in what I consider the

market’s sweet spot. Quality mid-sized

companies typically have seasoned

management and a decent and defen-

sible share of the market in which they

operate, yet at the same time they tend

to fly under Wall Street’s radar. This

creates opportunity, as fewer analysts

and investors chase after them.

I think there are managers who can

beat the mid-cap indexes, but Capital

Opportunity, due to its size, can no

longer access the mid-cap stock space

to the extent that it did, and Vanguard

keeps adding managers to my other

actively managed mid-cap favorite,

Selected Value

. So I’ll happily use a

mid-cap index or ETF to get additional

targeted exposure to this attractive sub-

set of stocks.

S&P MidCap 400 Growth ETF

serves as a complement to Capital

Opportunity in the

Growth Model

and a

replacement for it in the

Growth Index

Model

. When it comes to growth index-

es, S&P’s consistently distinguish them-

selves from their Russell and CRSP peers

by focusing on higher-quality companies.

Similarly,

S&P MidCap 400

Value ETF

is a decent replacement

for Selected Value in the

Growth Index

Model

. Since the ETF was launched

in September of 2010 through the end

of 2014, the index fund and Selected

Value have delivered nearly identical

returns of 92.9% and 95.0%, respec-

tively.

In the two situations above I want

mid-cap exposure with a tilt toward

value or growth stocks, but in the

Conservative Growth

and

Income

Models

I am looking for broad mid-cap

exposure in just one position. So I use

MidCap Index

in place of both Capital

Opportunity and Selected Value in the

Income Model

while

S&P MidCap

400 ETF

serves as a complement to

those actively managed funds in the

Conservative Growth Model

PRIMECAP Core

As with Capital Opportunity, I hope

you took my advice to add to this fund

in October 2012. From that time through

the end of 2014,

PRIMECAP Core

has

outgained 500 Index 67.5% to 49.4%.

As the name implies, this fund is

more “core” compared to the other

PRIMECAP-run Vanguard funds. It

is larger-cap than Capital Opportunity

and isn’t as growth-leaning as its big

brother, PRIMECAP.

This is one place where the

Vanguard fund has outpaced its sibling,

PRIMECAP Odyssey Stock

. Why? Both

funds launched nearly simultaneously,

and their portfolios are virtually identi-

cal, so Vanguard’s lower expense ratio

won the day over the

Odyssey

option.

I have a ton of respect for the

PRIMECAP Management team—I’m

glad we got this fund into the

Income

Model

before it closed. It serves as a

core stock holding that can play a bit

more offense than Dividend Growth.

S&P 500 Growth ETF

Vanguard investors can slice and

dice the domestic universe almost

any way they please now with mul-

tiple index providers to choose from.

Vanguard hasn’t taken a stand on which

index provider is better, citing only

lower costs as the reason for replacing

MSCI with CRSP and FTSE on nearly

two dozen index funds in 2013.

I can’t guarantee that

S&P 500

Growth ETF

will continue to out-

pace

Russell 1000 Growth ETF

LargeCap Growth ETF

, its two in-

house ETF competitors, but there is no

harm in investing with the lead horse.

The committee that selects stocks for

the S&P index favors high-quality com-