(PUB) Investing 2015

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Fund Family Shareholder Association

www.adviseronline.com

They aren’t saying.And finally,Vanguard

makes a point, in the footnotes, of say-

ing that all the underlying funds in its

Target Retirement

series are consid-

ered

Select Funds

Anyway, you are probably catch-

ing my drift here. The

Select Funds

serve another Vanguard agenda besides

continuing to promote indexing, which

is typical of the fund family: Driving

assets into middling active funds where

performance will be not dissimilar

to indexes, so investors won’t ever

underperform too dramatically, but also

won’t outperform.

Vanguard also says the fund manag-

ers on

Select Funds

are experienced

and “have a history of putting clients

first.” But do they actually eat their own

cooking? Do they, indeed, invest in the

funds they are managing, which would

truly be a sign that the managers are

aligned with their shareholders?

Let’s dig a little deeper into the

Select Funds

, starting with the domestic

stock choices and then working through

foreign funds and bond funds. Also,

you’ll notice I’ve added one more fund

to this Funds Focus, because while it

isn’t a

Select Fund

, it is a common rec-

ommendation in many of the portfolios

Vanguard designs for clients.

500 Index andTotal Stock Market

You really can’t blame Vanguard for

promoting its two domestic index behe-

moths.

500 Index

used to be the index

fund of choice, until

Total StockMarket

stole its thunder. While the former con-

tinues to track the S&P 500 index, Total

Stock Market has seen a revolving door

of benchmarks, originally being tied to

the Wilshire 5000, then the MSCI U.S.

Broad Market Index, and finally the

CRSP U.S. Total Market Index.

Is one better than the other? Take a

look at the first chart above. After almost

23 years sinceTotal StockMarket’s incep-

tion, the differences in performance are

almost imperceptible. Sometimes having

the small-caps in Total Stock Market’s

portfolio helped, other times it hurt.

As far as I’m concerned, if you’re

going to index, you have to decide

what kind of indexer you’ll be. Are

you an efficient-market die-hard who

believes in buying the market? Well,

in that case, neither of these funds

works for you. You should buy

Total

World Stock Index

and be done with

it. If you’re going to try to be more

nuanced in how you index, then you

need to decide if you want more or less

diversification amongst your domestic

stocks. But as you can tell, there’s little

to differentiate the two funds when it

comes down to performance and risk.

Frankly, for a core, large-cap fund,

I don’t think you can do better than

Dividend Growth

As for managers aligning their inter-

ests with shareholders, 500 Index’s

Michael Buek reportedly has between

$100,001 and $500,000 invested in

his fund, while Total Stock Market’s

Gerard O’Reilly reports having between

$500,001 and $1 million in his fund.

Explorer

This small-cap growth fund is the

poster child for the Portfolio Review

Department’s misguided belief that add-

ing more and more and more managers

to a fund somehow makes it better.

Explorer

currently sports a manage-

ment roster of eight different manage-

ment teams made up of no fewer than

16 different portfolio managers. If they

were chefs in a kitchen, I’d head over to

McDonald’s.

One fairly simple chart (which, by

the way, Vanguard would never show

you) tells the tale. Just take a look

above for a relative performance chart

comparing Explorer to its index bench-

mark, the Russell 2500 Growth Index,

over the past decade. You can see that

other than a few brief periods, it’s been

a long, slow slide into mediocrity. It

isn’t that the managers aren’t good at

what they do. But you can’t mix them

all together and expect the results to be

satisfying.

Historically, if investors indeed

wanted a small-cap growth fund, they

would have been much better off

investing in

SmallCap Growth Index

which since inception has generated an

average rolling five-year return that is a

full 1.5% better than Explorer’s. That’s

1.5% per year, compounded every year,

over rolling five-year periods.

Vanguard won’t tell you that, nor

that only seven of Explorer’s 16 man-

agers own shares in the fund. Only

Wellington’s Ken Abrams has more

than $1 million invested here. Abrams’

co-manager Daniel Fitzpatrick has

between $500,001 and $1 million

invested, and the other five managers

who own shares have stakes ranging

from just $10,001 to $500,000. That’s

not confidence-inspiring.

For my money, a fund like

PRIMECAP Odyssey Aggressive

Growth

gives me plenty of small-cap

exposure. It’s closed now, so you may

have to look outside Vanguard for a

small-cap growth fund if you feel you

really need it, or simply buy an index

fund and earn an average return.

MidCap Index

I’m a fan of

MidCap Index

for

a couple of reasons. First, the mid-

cap area of the market is one that

FOCUS

FROM PAGE 1

Which Index Fund Is Better?

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Explorer vs. Russell 2500

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Rising line = Explorer outperforming

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