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The Independent Adviser for Vanguard Investors
•
August 2015
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7
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800-211-7641
indexing apostles who suggest that hav-
ing roughly 50% of our portfolio in
foreign stocks is the scientifically surest
route to take. You have to look beyond
the raw data to find the best strat-
egy for maximizing potential returns
while avoiding exposure to excessive
risk. I believe investors with a long-term
growth perspective are best served by
investing anywhere from 10% to 40% of
their portfolio in foreign stocks, depend-
ing very highly on their risk tolerance
and investment time horizons, as well
as the state of the global economy. For
investors with more conservative goals
combining growth and income, I often
recommend a commitment of 10% or
less. And I can even see going to zero
for the most risk-averse investors. Why?
Because it may be too much to ask of
some conservative investors to take on
political and currency risks on top of the
other risks inherent in their investments.
Où est
Vanguard?
Vanguard’s approach to foreign
investing, as I’ve said, has been a moving
target. Founder and former Chairman
Jack Bogle was always pretty adamant
about keeping investments local, rath-
er than venturing overseas. As foreign
markets were beginning their big move
ahead of U.S. markets in the mid-2000s,
he questioned investors’ fealty to for-
eign investments, telling
Barron’s
that
the popularity of foreign funds begged
the question of whether those investing
in them then were making a bad timing
decision. It turns out they weren’t.
Former Chairman Jack Brennan was
more reasoned. He seemed to have the
philosophy shared by many asset alloca-
tors that one should have decent expo-
sure to foreign markets in a diversified
portfolio of funds. He said international
equities should make up no more than
20% of the
stock portion
of a diversi-
fied portfolio of stocks, bonds and cash.
His less-than-rousing endorsement was
only that international stocks “
may
[my
emphasis] benefit your portfolio.”
Vanguard’s moves to put 40% of
investors’ equity assets into foreign
stocks and 30% of fixed income assets
into foreign bonds are but the latest
iteration. And, as I reported to you
last month, the move to add mainland
Chinese shares to Emerging Markets
Index is a marketing coup, but may not
move the needle much for shareholders.
I still recommend that the prepon-
derance of your assets remain invested
in domestic rather than foreign stock
and bond funds. Vanguard’s use of
a currency-hedged index for
Total
International Bond Index
renders
much of its diversification benefit moot
In coming months, we’ll have a con-
versation about Vanguard’s array of for-
eign funds. In the meantime, stick with
me andwith themanagers at International
Growth, and we’ll be just fine.
n
QUOTABLE
Jack Bogle Changes His Tune
IN AN INTERVIEW in the August 2015 issue of
Money Magazine
, Vanguard founder Jack Bogle
says that if it were up to him, “I would have made it mandatory that we continue to disclose
executive compensation.”
Bogle has done a complete 180° on the subject, given that he and Vanguard sued me and my
newsletter publisher in 1992 after
Forbes Magazine
reported my estimates on his own compen-
sation.
But let’s back up a bit. First of all, Vanguard never disclosed executive compensation volun-
tarily, nor did it do so with transparency. So Bogle saying he would have continued to disclose
the data is just wrong.
Adhering to an SEC rule, Vanguard only reported the contributions that its largest funds
made towards compensation for its chairman, Jack Bogle, and its president, Jack Brennan. In
other words, if a fund was large enough, that fund’s Prospectus Part B, Statement of Additional
Information, included a table that broke down how much money that particular fund paid
towards Bogle’s and Brennan’s compensation. However, many Vanguard funds fell under the
limit and hence did not break down the executive’s compensation. Plus, because different
Vanguard funds reported financials on different fiscal years, the numbers couldn’t be easily
compared or added up. So there wasn’t a whole lot of real disclosure going on here.
However, in 1992, I used disclosures from all the funds that gave specific details on Bogle’s
and Brennan’s compensation, plus the broad numbers from funds that didn’t, built a model that
took the varying fiscal years into account, and estimated Bogle’s and Brennan’s full, calendar-
year compensation.
Forbes
, in its September 28, 1992 issue, reported my findings.
Vanguard sued to shut down my newsletter shortly thereafter. They also stopped making the
disclosures. As Bogle said years later, “I didn’t see any reason to disclose.”
However, the tactic to shut me down didn’t work—Vanguard withdrew the lawsuit, and in
a
Philadelphia Magazine
profile in August 1993, Bogle admitted that he’d told a “bare-faced
lie, to understate it,” when he was quoted in
The Wall Street Journal
saying that my numbers
were “off by 400 percent to 500 percent.”
Later, in a May 12, 2006, article in the
Boston Globe
on an SEC proposal to force funds to
provide better disclosure, Bogle went even further and admitted that my numbers were “about
right,” saying he was paid roughly $2.5 million. (I told
Forbes
I’d calculated it at $2.6 million.)
So you can imagine my surprise to see that Jack Bogle is now on record telling
Money
Magazine
that he “would have made it mandatory” to disclose compensation. In fact, Bogle
echoed the arguments I’ve made over the years, saying. “I think openness is important if you’re
a company like Vanguard because these people own not only your funds but the management
company too. They’re entitled to any information they want.”
Years ago, in the May 2006 issue of
The Independent Adviser for Vanguard Investors
, I labeled
Jack Bogle a hypocrite for his turnabout on disclosure, now that he was a public citizen rather than
an industry executive. According to the
Boston Globe
, “Bogle called Wiener’s charge of hypocrisy
“fair enough to say” and acknowledged he didn’t like it when [Wiener disclosed his compensation].”
But in the
Money
interview, Bogle really goes the full monty on his hypocrisy.
“If it’s painful to disclose,” says Bogle. “Well, that’s too bad.”
Well said, Jack. Well said.