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The Independent Adviser for Vanguard Investors
•
March 2015
•
15
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800-211-7641
panies, which held up better than com-
petitors in both the tech crash of 2000–
2002 and the credit crisis of 2007–2009.
Losing less is a good strategy for grow-
ing money over time, and that’s why I
use this ETF to target the large-growth
space in the
Growth Index Model
.
Selected Value
This has been a standout fund at
Vanguard over the years and remains a
solid buy for the moment, but Vanguard
is on an inexorable path to diluting its
stock-picking excellence.
Jim Barrow is slated to step away
from the fund in mid-2015, and while
I hold Barrow in the highest regard, his
departure isn’t what has my antennae
twitching. Barrow’s longtime co-man-
ager, Mark Giambrone, is proving to be
a more-than-worthy successor and will
continue to carry on the Barrow style
and tradition.
It’s not the poor 2014 performance
which has caught my attention, either.
Selected Value’s 6.4% return in 2014
was well behind
MidCapValue Index
’s
13.8% gain, but in a year when
REIT
Index
far outpaced the market, gaining
30.1%, I might expect Selected Value
to trail. While the index allocates about
5% of its portfolio to REITs (it has been
closer to 15% in the past), Selected
Value’s managers have typically been
more skeptical of the sector and have
remained light in their REIT holdings.
What’s got me concerned about
Selected Value is Vanguard’s decision
to add more managers rather than close
the fund to new investors. It’s been
nearly 10 years since Donald Smith and
Co. was added to Selected Value and the
fund settled into a consistent mold, with
Barrow and Giambrone investing three-
quarters or so of the assets and Smith
overseeing a quarter. The portfolio con-
sistently held 60 to 70 stocks, with
about 25% of assets in the top holdings.
In March 2014, Vanguard added a
third sub-adviser, Pzena Investment
Management. Pzena quickly became
responsible for 12% of the fund
(mostly at the expense of Barrow and
Giambrone), and the number of hold-
ings jumped to 125 or so. Pzena’s long-
term record may be stellar, but it’s taken
big gambles on financials and other
down-and-out sectors and hasn’t always
come out of it smelling so sweet.
As you add more and more managers
to a fund, good stock picks by one or two
managers are often diluted by bad ones
from the third. We are nowhere near the
absurdity of
Explorer,
which has eight
different management teams and hence
next to no chance of distinguishing itself
from the index, but my skeptic’s eye is
wide open on Selected Value.
Short-Term Corporate ETF
Vanguard’s bond department is solid,
and I still prefer its active management
over indexing, but this is the highest-
yielding short-maturity option in
DISTRIBUTIONS TO COME
Quarterlies Plus
IT’S THAT TIME OF YEAR AGAIN. While the December distribution period seems like it happened
just a couple of weeks ago, time marches on, and March marks 2015’s first round of quarterly
distributions, as well as any supplemental distributions that Vanguard must pay out. Supplemental
distributions are gains or income that were earned but not distributed in 2014 and must be paid
out before the end of the first quarter to keep funds in compliance with SEC regulations.
Health Care
and
Energy
are habitual supplemental distributors of both income and capital
gains. Vanguard’s mid-cap and small-cap index funds have consistently distributed a little extra
income (not capital gains) in March, and last year all of Vanguard’s short-term and intermediate-
term Treasury, investment-grade and index bond funds paid out extra capital gains, as did
Long-Term Investment-Grade
and
Total Bond Market Index
.
Dividend Growth
,
Extended
Market Index
and
Tax-Managed Capital Appreciation
also paid out supplementals in March
2014. That being said, at year-end few funds had large realized capital gains on their books, with
the largest held by
MidCap Growth
,
Capital Value
and
Global Minimum Volatility.
Vanguard should have the data for 2015 out by early March.
As a reminder, I encourage taxable investors to direct distributions to money market accounts
instead of reinvesting immediately in the fund where the distribution came from (something I
practice with my own money). This allows you the flexibility to redeploy the money to underper-
forming funds or to pay a tax bill without having to sell shares down the road.
The list of regular quarterly income payers is below:
Remember, the ETF shares of the funds listed above will also pay out distributions. Additionally,
a few other ETFs are scheduled to pay out regular quarterly income:
500 Index
Balanced Index
Convertible Securities
Developed Markets Index
Dividend Appreciation Index
Emerging Markets Index
Equity Income
European Index
Financials Index
Global ex-U.S. Real Estate Index
Growth Index
High Dividend Yield Index
Inflation-Protected Securities
LargeCap Index
Pacific Index
REIT Index
Short-Term Inflation-Protected Index
STAR Conservative Growth
STAR Income
Target Retirement Income
Tax-Managed Balanced
Total International Stock Index
Total Stock Market Index
Total World Stock Index
Utilities Index
Value Index
Wellesley Income
Wellington
World ex-U.S. Index
World ex-U.S. SmallCap Index
Extended Duration Treasury ETF
MegaCap ETF
MegaCap Growth ETF
MegaCap Value ETF
Russell 1000 ETF
Russell 1000 Growth ETF
Russell 1000 Value ETF
Russell 3000 ETF
S&P 500 Growth ETF
S&P 500 Value ETF
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