(PUB) Investing 2015

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The Independent Adviser for Vanguard Investors • October 2015 • 15 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
WHAT DO MOST INVESTORS do when
markets are at their worst? Absolutely
nothing. Yet an article posted late in
the afternoon of Sept. 21 on The Wall
Street Journal’s website has raised
hackles among bond fund manag-
ers and investors—and in particular,
Vanguard investors.
The article, The New Bond Market:
Some Funds Are Not As Liquid as They
Appear ),
identifies a number of the largest bond
funds in the U.S. and says their port-
folios are rife with illiquid corporate
bonds—meaning the funds are at risk
of holding bonds that, unlike Treasurys,
will be difficult to sell quickly to meet
redemptions if bond markets tumble and
investors flood the exit ramp. Topping
the list of 18 funds was none other
than High-Yield Corporate, one of six
Vanguard funds under scrutiny.
But let’s think about this for a
moment. Central to the concern voiced
by many in the media and the invest-
ment universe about liquidity, or the
lack of it, in the bond market is the
belief that at the first sign of falling
bond prices, investors will head, en
masse, for the exits only to find the way
out a lot smaller than expected. What
that script misses is the fact that the vast
majority of investors don’t panic and
don’t push the sell button; instead, they
stay in their seats.
Let’s analyze a couple of
Vanguard’s funds on the WSJ’s list.
Looking back to 2008, arguably the
most stressful time in the high-yield
bond market’s history, investors pulled
a net $100 million from High-Yield
BONDS
Liquidity and Safety
of the NASDAQ International Dividend
Achievers Index called the NASDAQ
International DividendAchievers Select
Index. (The non-Select index dates to
September 2005 and is tracked by the
PowerShares International Dividend
Achievers ETF, symbol PID, with a bit
more than $1 billion in assets.)
The high-yield fund will track a
brand new index, the FTSE All-World
ex-U.S. High Dividend Index.
What Vanguard isn’t doing is offer-
ing actively managed counterparts
to these funds, as they do domesti-
cally. Dividend Growth and Equity
Income are both benchmarked to the
same indexes used by the domestic
Dividend Appreciation Index and
High Dividend Yield Index funds.
And that’s too bad, because the active
managers have run circles around their
index competitors. Since the index fund’s
inception, Wellington’s Don Kilbride,
who took the reins on Dividend Growth
almost 10 years ago, has generated a total
return of 108.5% versus the index fund’s
80.7% return, more than 34% better.
Since High Dividend Yield Index’s
inception in 2006, that fund has returned
63.4% versus the 73.1% return for
the actively managed Equity Income.
Dividend Growth
Under Kilbride
8/06 8/07 8/08 8/09 8/10 8/11 8/12 8/13 8/14 8/15
Rising line = Dividend Growth outperforms Dividend App. Idx.
1.00
1.05
1.10
1.15
1.20
Equity Income vs.
High Dividend Yield Index*
8/048/058/06 8/078/08 8/098/108/118/128/138/148/15
Rising line = Equity Income outperforms High Div. Yld. Idx.
0.96
0.98
1.00
1.02
1.04
1.06
1.08
1.10
*Includes indexdata from2004 to2006.
▼High Dividend
Yield Index fund
inception 11/06
Again, the active managers have consis-
tently outperformed, as the charts show.
So, in the end, Vanguard is simply
broadening its index-fund lineup with a
couple more overseas funds, slicing the
indexing baloney ever finer in the hopes
of attracting investors with a desire for
yield, no matter where it comes from. n
Cash Flows During Bond Crises
THE FINANCIAL CRISIS
2008 Flow % of Assets Year-End Assets
Short-Term Investment-Grade ($1,128) -6% $17,743
Intermediate-Term Investment-Grade $1,489 21% $7,057
Intermediate-Term Bond Index $1,015 12% $8,621
Total Bond Market $6,123 8% $72,851
Long-Term Investment-Grade ($90) -2% $5,904
High-Yield Corporate ($100) -1% $6,963
LARGEST 12-MONTH OUTFLOWS
Net Outflow % of Assets Assets Period
Short-Term Investment-Grade ($1,765) -5% $37,051 Dec.10–Nov.11
Intermediate-Term Investment-Grade ($3,033) -18% $16,559 Dec.12–Nov.13
Intermediate-Term Bond Index ($2,922) -21% $14,080 Feb.13–Jan.14
Total Bond Market ($1,200) -1% $185,240 Mar. 13–Feb.14
Long-Term Investment-Grade ($1,575) -11% $14,132 Sept.14–Aug.15
High-Yield Corporate ($3,290) -21% $15,896 Oct.12–Sep.13
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