(PUB) Investing 2015

672 / 772

14 • Fund Family Shareholder Association
have begun to notice near-term per-
formance, have assets grown.
I would not be a buyer of Strategic
Equity, and if you happen to be talk-
ing to a Vanguard financial planner
who recommends the fund, ask him or
her whether they themselves own any
shares, or whether they know if any of
the managers or executives who’ve told
them to recommend the fund own any
shares in it. Then show them the graph
comparing its performance to Extended
Market Index. That planner might also
suggest you buy Extended Market
Index, another one of Vanguard’s regu-
lar recommendations that didn’t make
the Select Fund list. After the planner
has said his or her piece, walk away.
Windsor II
When Jim Barrow of Barrow Hanley
ranWindsor II solo, it was a great large-
cap value fund with a strong style of
buying companies with good dividend
yields and low price-to-earnings ratios.
And the portfolio was relatively tight,
as Barrow focused on the companies
he liked the best rather than diwor-
sifying the fund. If you take a look
at Diversified Value Annuity , which
Barrow’s firm still runs solo, you’ll see
a portfolio of just 44 stocks at the most
recent report. By contrast, Windsor II,
with its current roster of five manage-
ment teams made up of 12 portfolio
managers, holds 258 stocks.
Since the annuity’s inception, it has
generated an average rolling five-year
return of 6.8% annualized, compared
to Windsor II’s average of 6.2% over
the same period. Over the past decade,
as managers have come and gone from
Windsor II, the annuity (which has a
higher expense ratio) and the fund have
about paced one another, though the
annuity’s longer-term performance still
beats the larger and cheaper Windsor II.
Only two of Vanguard’s directors
own shares in Windsor II, and one of
them only made his first purchase in
2014. Vanguard’s chairman does not
have a stake in Windsor II. As for
the fund’s managers, it should prob-
ably come as no surprise that Barrow,
who’s been managing money here for
decades, has over $1 million invested in
Windsor II. His two co-managers have
between $100,001 and $1 million in the
fund, and Vanguard’s Michael Roach
has between $50,001 and $100,000
invested here. Besides those four man-
agers, there’s not another dime from
any of the portfolio jockeys at Lazard,
Hotchkis and Wiley, or Sanders Capital
in the fund.
If Windsor II is a Select Fund, then
what should we make of a fund like
Dividend Growth, which is also a large-
cap, value-oriented fund and the better
performer? Is it a Super Select Fund?
Believe me, I don’t need hordes of
shareholders beating down the doors at
Dividend Growth, overwhelming man-
ager Don Kilbride with assets, so I’m
happy if Vanguard wants to promote
Windsor II to the uninitiated. But you
and I know a lot better.
Emerging Markets Stock Index
andTotal International Stock Index
In the old days, Vanguard offered its
Developed Markets Index as well as
Emerging Markets Stock Index and
then mixed and matched them to get
you an allocation that made up Total
International Stock Index. Individual
investors could buy the broad fund
or mix and match the two funds for
themselves depending on their risk tol-
erance, going a bit heavier or lighter
on the emerging markets component
for instance. But with the Select Funds
I’m assuming that Vanguard expects the
DIY investor to choose the broad index
fund most of the time and, if they’re
feeling frisky, to add the higher-risk
emerging markets fund as well.
Total International Stock Index is
a fine fund as index funds go. But
as you’ll read in a moment, I think
Vanguard’s got a better option when it
comes to broad foreign stock exposure.
As for Emerging Markets Stock
Index, while its actively managed com-
petitor, the relatively new Emerging
Markets Select Stock , was a strong
challenger out of the gate, it’s lost most
of its advantage, and the funds’ perfor-
mance since the latter’s 2011 inception
is about neck-and-neck.
Both of these funds are very popu-
lar with Vanguard’s directors, as all
but two of the 10 have stakes worth
more than $100,000 in one or both.
And while manager Michael Perre
has between $100,001 and $500,000
in Total International Stock, his stake
in the EM fund has dwindled from
between $50,001 and $100,000 to a
more modest $10,001 to $50,000.
International Growth and
International Value
Frankly, I don’t think you need both
of these funds in a portfolio, but of
course Vanguard doesn’t want to pick
sides, so it takes the easy route and says
both broadly diversified active funds
are Select Funds. In fact, when mea-
sured against Total International Stock
Index, both of these funds could be
“select,” since both have outperformed
it, as the relative performance chart at
the top right illustrates.
As you can also see, there are defi-
nitely periods when the index fund takes
the upper hand, but if you’re an investor
rather than a trader, you’ll earn more
Strategic Equity vs.
Extended Market Index
Rising line = Strategic Equity outperforming
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
3/97 3/99 3/01 3/03 3/05 3/07 3/09 3/11 3/13 3/15
ActiveManagement
Outperforms
3/97 3/99 3/01 3/03 3/05 3/07 3/09 3/11 3/13 3/15
International Growth vs. Total Int'l
International Value vs. Total Int'l
Rising line = Active fund outperforming
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
>