(PUB) Investing 2015

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certainly less than $10 billion),

Vanguard probably can’t get too jazzed

up about jumping into that fray.

The only real excitement going on

among the foreign funds these days

has been the June announcement that

Vanguard would add smaller stocks to

Developed Markets Index

Emerging

Markets Stock Index

European

Index

and

Pacific Index

, along with

a new allocation to mainland-China

A-shares in the emerging markets fund,

something I wrote about in the July

2015 issue.

In the past, I’ve noted that since

Global Equity

became multimanaged

in 2004, Vanguard hasn’t had a foreign

fund run by just one management team

for years. Global Minimum Volatility

breaks that streak, though its non-tra-

ditional investment objective makes it a

bit of an outlier.

In the August letter, we took an in-

depth look at investing overseas and

whether it makes sense to hew to a

40% (of equities) allocation to foreign

stocks at all times, as Vanguard seems

to believe, or to allow the markets and

your head and heart to determine where

your allocation should stand.

One thing we didn’t discuss was

the actual funds themselves. So, let’s

do that. But first, I do want to mention

something called fair-value pricing,

which is the day-to-day manipulation

of fund prices (not ETF prices) that

Vanguard engages in (as required by

the SEC) to prevent attempts to jump

ahead of news events that may cause

market moves in time zones many

hours different from our own. Investors

might, for instance, try to trade Pacific

Index, which has about 60% of its

assets allocated to Japanese stocks and

another 25% or so in Australian and

Korean stocks, when those markets are

closed and there is major, market-mov-

ing news occurring in those countries

while U.S. markets remain open.

The difference between the price

of a fund’s regular shares and its ETF

shares can sometimes tell the tale of

a Vanguard intervention. Last year,

for instance, Emerging Markets Stock

Index’s daily return and the return of its

ETF shares varied by as much as 1.4%

to 1.8% on a couple of days. As I said,

differences between ETF and open-

end fund performance tend to even out

within a day or two, and unless you’re

trading in and out of the open-end fund,

which Vanguard will quickly put a stop

to once their computers catch up, you

shouldn’t worry too much about fair-

value pricing.

With all of that said, and with

August’s primer on investing over-

seas as backup, here’s where Vanguard

stakes its foreign investing claims.

Developed Markets Index

Sell.

Once a fund of funds, Developed

Markets Index now holds individual

stocks, just like the rest of Vanguard’s

foreign funds. While the benchmark the

fund tracks has changed over time, and

is changing again, its mission remains

the same: Tracking a broad set of stocks

from established foreign markets. The

new index to which the fund will tran-

sition, the FTSE Developed All Cap

ex-U.S. index, includes smaller stocks

as well as Canadian stocks, something

the fund did not hold in previous incar-

nations. Based on historical data, these

additions have added to performance

over time, though up/down volatility

has also increased. As you might expect,

Developed Markets Index ignores the

emerging markets component that one

finds in

Total International Stock

Index

World ex-U.S. Index

. And

there’s the rub. If you buy into the index-

ers’ credo that one should index “all”

markets rather than a slice of the pie,

then this fund is a non-starter. However,

if you’re tempted, remember that the

fund has ETF shares (VEA) available.

Emerging Markets Stock Index

Hold.

Here’s another fund that’s

getting a new benchmark, but this one

is fraught with issues that you won’t

find in Vanguard’s other funds. As

Jeff and I have reported before, most

recently in the July letter, Vanguard

is making a push into the volatile

A-shares market of mainland China.

The FTSE Emerging Markets All Cap

China A Inclusion index is the first

of Vanguard’s benchmarks to venture

into the highly regulated and opaque

mainland China arena. Vanguard has

already said that it’s going to have to

deviate from the index by “sampling”

rather than “replicating,” and this new

index will be adjusted by FTSE on an

ongoing basis because of the limits

that the Chinese government puts on

foreign entities’ ownership of A-shares.

But this isn’t some huge change overall.

While the small caps that will be added

to this fund will increase holdings sub-

stantially, the exposure to China should

only grow by about 3% from the cur-

rent 27% or so.

The emerging markets are consid-

ered a growth engine, internationally,

but they’re also riskier than mainstream

domestic markets. And China’s slow-

down, just as Vanguard is upping the

ante there, begs the question of whether

the risk-return balance favors returns as

much today and tomorrow, as it has in

the past.

Also, are the large-cap domestic

companies you own today already giv-

ing you enough exposure to emerging

markets through their global opera-

tions, or do you need and want a

focused fund such as this one? I think

a small allocation here can make sense,

as there will always be local companies

that will understand and be able to take

advantage of local markets in a fashion

the bigger global conglomerates won’t.

That said, it’s not a risk I’m taking

right now.

As with Vanguard’s other foreign

index funds, there are ETF shares

(VWO) available.

Emerging Markets Select Stock

Hold.

Vanguard’s first and only

move into active management in the

emerging markets space looked good at

the onset, but has proved a loser. It was

a cautious move—doling out portions

of the portfolio to four separate firms:

Wellington, M&GCapital Management,

Oaktree Capital Management and Pzena

Investment Management.

Having four firms on this fund reduc-

es the risk of a single manager misstep,

but at the same time limits the ability

of any one manager to add significant

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