(PUB) Investing 2015

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14 • Fund Family Shareholder Association
AT ITS INCEPTION in 2005, Diversified
Equity was marketed by Vanguard as
a “starter fund for investors seeking
a broadly diversified, low-cost equity
portfolio,” according to then-Vanguard
Chairman Jack Brennan. Some of the
marketing for the fund, in fact, featured
photos of bicycle training wheels.
Calling it a “simplified solution” for an
as-yet unidentified problem, Diversified
Equity would become the only all-equity,
all-active management portfolio among
more than a dozen funds-of-funds at
Vanguard. Large-cap growth and value
funds would soak up about four times
the assets of small- and mid-cap funds,
making it similar in composition to a
broad U.S. market fund like Total Stock
Market Index . Then, as now, the fund
offered no international diversification,
which (as Vanguard has made abundant-
ly clear over the years) is so important
that Vanguard now recommends that no
less than 40% of your equity holdings
come from non-U.S. markets.
At introduction on June 10, 2005,
Vanguard cleared up one question, say-
ing the fund would simplify investing
because you’d have “no need to select
individual stock funds that cover various
market segments or to rebalance your
fund allocation to control risk.” They
also said that the fund would give inves-
tors the opportunity to balance their
index fund holdings “with the market-
beating potential of actively managed
funds,” and that with “[Vanguard’s] low
costs and the talents of well-chosen
managers—[Diversified Equity] can
add value to an index portfolio.”
Vanguard even suggested that one
way to use the fund would be to invest
half your money in a broad market
index fund such as Total Stock Market
or 500 Index, and the other half in
Diversified Equity.
As I’m sure you know, I wasn’t a fan
when the fund was first proposed, and I
was even less of one when it was intro-
duced. But even I didn’t call the fund
the “Stupid Investment of the Week,”
as MarketWatch columnist Chuck Jaffe
did. He wasn’t far off.
ToTrack and Lag the Index
So, how’d this “simplified solu-
tion” work out for investors who put
their money into Diversified Equity on
the presumption that Vanguard’s well-
chosen managers and low costs would
add value to their portfolios? Well, let’s
roll the video tape (or the DVR, given
the changes in our media libraries that
we’ve made over the last decade or so).
While the lineup of eight Vanguard
funds has remained the same over the
FUND OF FUNDS
Older and Messier
FUNDS OF FUNDS
Targeting Cheaper Shares
VANGUARD FINALLY TOOK my advice
and is going to use institutional shares
of its various index funds in its Target
Retirement series of funds-of-funds. You
may recall that in 2007 I suggested
that the firm could and should use its
institutional shares to lower the operat-
ing expense ratios on its Target funds,
particularly given that the funds are
components in huge, extremely cost-
efficient 401(k) retirement plans. I raised
the issue again in 2011 when Vanguard
began issuing lower-cost Target shares
to monstrous institutional investors.
Well, now they’ve actually intro-
duced a full lineup of Institutional
Target Retirement Institutional shares
(yes, that’s the name). The minimum
investment is a cool $100 million if you
buy one fund, but for institutions or, say,
401(k) plans, it’s $100 million across the
entire family of Targets. Expenses will
run about 0.10%, which is about what
I calculated they’d be years ago had
Vanguard used its lower-priced shares
in the first place. The funds launched
June 26.
What Vanguard doesn’t say in its
prospectus for these new Target funds,
however, is that they specifically will
be using institutional share classes for
these high-minimum funds, which I find
strange. But hey, if you’ve got $100
million to put into Institutional Target
Retirement 2030 Institutional, then I
guess you can do your own research. n
Lower Costs on Target
$100 Million Minimums Ticker
Fund.
No.
Exp.
Ratio $1,000 Minimums Ticker
Fund.
No.
Exp.
Ratio
Institutional Target 2060 VILVX 1672 0.10% Target Retirement 2060 VTTSX 1691 0.18%
Institutional Target 2055 VIVLX 1671 0.10% Target Retirement 2055 VFFVX 1487 0.18%
Institutional Target 2050 VTRLX 1670 0.10% Target Retirement 2050 VFIFX 699 0.18%
Institutional Target 2045 VITLX 1669 0.10% Target Retirement 2045 VTIVX 306 0.18%
Institutional Target 2040 VIRSX 1668 0.10% Target Retirement 2040 VFORX 696 0.18%
Institutional Target 2035 VITFX 1667 0.10% Target Retirement 2035 VTTHX 305 0.18%
Institutional Target 2030 VTTWX 1666 0.10% Target Retirement 2030 VTHRX 695 0.17%
Institutional Target 2025 VRIVX 1665 0.10% Target Retirement 2025 VTTVX 304 0.17%
Institutional Target 2020 VITWX 1664 0.10% Target Retirement 2020 VTWNX 682 0.16%
Institutional Target 2015 VITVX 1663 0.10% Target Retirement 2015 VTXVX 303 0.16%
Institutional Target 2010 VIRTX 1662 0.10% Target Retirement 2010 VTENX 681 0.16%
Institutional Target Income VITRX 1673 0.10% Target Retirement Income VTINX 308 0.16%