(PUB) Investing 2015

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6 • Fund Family Shareholder Association
until April 15 to fund an IRA for 2014,
and then if they earn some money this
year you or they can add money for
2015 as well.
Remember, the longer you or your
children wait, the smaller your potential
compounded earnings. Of course, with
income comes taxes, and your children
will need to begin filing their own tax
returns. And, as I mentioned earlier, con-
tributions to a Roth IRA are not made
pre-tax, as they would be on a tradi-
tional IRA. Also, be aware that if you do
help your child by contributing on their
behalf, the total amount put into the IRA
cannot exceed their total earnings in any
given tax year. (This will be more of a
concern for the youngest investors.)
In any case, helping to put your teen-
age child or grandchild on the road to a
more comfortable retirement may truly
be one of the best gifts you can make,
and it will be one that keeps on giving
year after year. n
WE ALL WANT TO HAVE our cake and
eat it, too. For investors, the equivalent
would be a fund that delivers all of
the returns of the stock market without
the risk, or at least with a lot less risk.
Vanguard’s newest actively managed
stock fund, Global MinimumVolatility,
is gaining attention as a fund that might
leave you with a full stomach and a smile.
Investors have added over $200 million to
the young fund over the past five months,
so let’s see what all the fuss is about.
As the inflows suggest, the fund’s
off to a good start. Global Minimum
Volatility’s 23.6% gain since its
December 2013 inception is well ahead
of in-house competitors Total World
Stock Index’s 11.4% gain and Global
Equity’s 13.2% return. The fund’s clos-
est low-volatility competitor, iShares
MSCI All Country World Minimum
Volatility ETF (ACWV), only returned
18.5% over that stretch. But 15 months
is too short a timeframe to declare any
fund an unbridled success.
Let’s take a step back and consider
the strategy behind Global Minimum
Volatility. The fund is managed by a
trio from Vanguard’s in-house Equity
Investment Group—James Troyer,
James Stetler and Michael Roach. They
are Vanguard’s go-to crew for quan-
titatively managed (computer-driven)
stock portfolios. Their aim is to build
a portfolio that has broad global stock
exposure but less volatility than the
global stock market index.
The managers employ two key strat-
egies toward achieving this goal. One
is constructing a basket of stocks that
exhibit lower volatility than the market
as a whole. This doesn’t just mean pick-
ing the lowest-volatility stocks around,
but also considering how those stocks
come together in an overall portfolio.
Vanguard also has some self-imposed
constraints to keep the portfolio from
becoming overly concentrated in one
sector or region. The second compo-
nent to the strategy is the use of hedges
to minimize or eliminate foreign cur-
rency risk completely.
Minimum Volatility
The first question you might ask
is, does it make sense to own a basket
of low volatility stocks? Unfortunately,
real-world low-volatility strategies are
relatively new—largely developed in
response to investors who were burned
by two major bear markets inside of 10
years (the tech crash and then the credit
crisis), and didn’t believe they could
handle another price-crushing decline.
The earliest minimum volatility ETFs
were only launched in 2011 and haven’t
been tested in a bear market in real time.
However, index provider MSCI has
back-tested its low-volatility strategy
and has used it to piece together data
going back to mid-1993 that can pro-
vide more perspective. The chart to the
left shows the relative performance of
the MSCI All Country World Index
(ACWI) versus a minimum volatility
version of that same index. When the
line is rising, the traditional ACWI index
is outperforming, and when it is falling,
the minimum volatility version is out-
performing. Over the period for which
MSCI has data, the minimum volatility
index outperformed the traditional index
by 1.5% a year, generating a 9.1% annu-
alized return versus a 7.6% return.
You can see that the periods when
the minimum volatility index outper-
formed most substantially were, not sur-
prisingly, during the two bear markets
I mentioned earlier. While the MSCI
ACWI index declined 46.3% as the
tech bubble burst, the minimum volatil-
ity index only dropped 18.1%. In the
credit crisis, when the traditional index
tumbled 54.6%, the minimum volatility
index fell 38.6%.
As this is a minimum volatility story,
and Vanguard references the calcula-
tion in the fund’s annual report, let’s
talk standard deviation. Standard devia-
tion is a measure of volatility that
the financial world often equates to
risk. Specifically, standard deviation
measures how much a fund’s returns
strayed from its average. The higher the
standard deviation, the more a fund’s
returns varied over time. Over the
20-plus year period for which MSCI
has data, the minimum volatility index
MINIMUM VOLATILITY
Going Against Convention
MinimumVolatilityWins
By Losing Less
2/95 2/972/99 2/01 2/032/05 2/07 2/09 2/11 2/13 2/15
Bear Market
Rising Line = Traditional Index
Outperforms
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4