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The Independent Adviser for Vanguard Investors • August 2015 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
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of the maelstrom that would accom-
pany a 10% correction, the cool heads
at Barrow Hanley, PRIMECAP and
Wellington Management would be
picking up deals left and right.
China Cooling
Greece is so yesterday. This past
month, the action has been in China,
where it appears the economy may be
cooling faster than originally thought.
Don’t take the government’s word for
it, though—they say growth came in
at an annualized 7.0% in Q2, which
seems impossibly right on the money,
hitting the stated 7.0% target perfectly.
Me, I’ve got my eyes on the commod-
ity markets, where gold, copper and oil,
to name an important trio, have been
falling on investors’ assumptions about
declining demand. (More on gold, or
rather Precious Metals & Mining, in
a moment.)
Whether you call it interaction, inter-
vention or interference, Shanghai’s stock
market was the poster child for volatility
and uncertainty in July. When the gov-
ernment allows over 1,000 companies to
halt trading in their stocks, manipulates
the use of margin (by relaxing and tight-
ening lending rules), bans IPOs to reduce
supply and tells large investors they can’t
sell while things are going down—well,
to me, that smacks of interference of the
highest order. And it didn’t work. Last
Monday, Shanghai stocks fell 8.5% in a
single trading session. The market ended
the month 29.1% below its June 12 high.
Are the Chinese really succeeding
in shifting their export economy into
a domestic-demand economy without
losing steam? Hard to say, but given
WARMING FROM PAGE 1 > their ham-handed attempts to prop up
stocks, you have to wonder whether the
command-control system there really
works when you begin to give peo-
ple some freedoms and they refuse to
march in lockstep.
No, the Chinese markets are not free,
and Vanguard’s insistence that it will
continue with its plans to add mainland
stocks to Emerging Markets Index by
following a newly cast FTSE Emerging
Markets All-Cap China A Inclusion
index seems at best ill-advised, though
I can think of one reason they may want
to do it: In buying mainland stocks
now, before MSCI—the big kahuna
of emerging markets indexes—adds
them to its emerging markets index,
Vanguard is essentially front-running a
tidal wave of cash that will eventually
make its way into that market. When
and whether that cash pushes prices up
dramatically remains to be seen. But
as Jeff and I explained last month, the
benefits to being first are pretty darned
slim. Still, they make for good market-
ing. Total International Stock lagged
in July with a 0.8% loss. It’s up 4.5%
this year, while my favorite all-weather
foreign fund, International Growth,
has generated a 5.5% gain.
Getting back to gold and falling com-
modity prices, July was a month that
the few die-hard investors remaining
in Precious Metals & Mining will want
to forget. The fund’s 16.2% decline
ranks as the 12th worst month in the
fund’s history—though it pales beside
the 39.9% fall in October 2008. When
times are good, this fund can glitter.
But the bad times are really, really bad,
and they’ve been terrible now for years.
Precious Metals & Mining had a three-
year stretch from 2011-2013 as the
worst-performing fund in Vanguard’s
stable, and followed that up in 2014
as the second worst performer. With
July’s tumble, the fund established a
new MCL (maximum cumulative loss),
down 72.6% from its high reached
before the credit crisis in May 2008. All
this in the midst of a bull market!
True contrarians may be drawn to
invest here, but you’ll need a cast-iron
stomach to handle the ride. In all hon-
esty, how much of your portfolio would
you really want to stake on this volatile
sector? A 5% position would be large,
in my view, wouldn’t add much on the
way up—but could certainly induce
plenty of stress on the way down.
One fund that has begun to rise,
phoenix-like, from its ashes is Prime
Money Market. Its yield has risen
from just 0.01% on May 29 to the recent
0.04% hit on Monday, while the yields
on all of Vanguard’s other money funds
remain anchored at 0.01%. What’s
going on? I don’t have a clue, but I’m
guessing expenses are being cut to the
bone. Fee waivers, which Vanguard
maintains are temporary though they’ve
been in place for years now, are going
up. Over the past two years, fee waivers
on Prime Money Market alone have
jumped from $3.3 million to $8.1 mil-
lion, a 150% rise, while assets are up
just 9.6% over the same period.
So, forget “investing” in cash or in
gold, but do continue to hold to a well-
diversified portfolio of great managers.
Our Model Portfolios are handling the
market turns just fine, and the Growth
Model Portfolio, up 5.1% this year,
is ahead of Total Stock Market, Total
International Stock and Total Bond
Market . That should give you a nice,
warm feeling. n