14
•
Fund Family Shareholder Association
WOULD YOU CHARACTERIZE
perfor-
mance that outpaced an index bogey
by less than 20 basis points (0.20%) as
“strong?” That’s howVanguard Chairman
Bill McNabb termed it in the most recent
semiannual report for
Morgan Growth
. I
don’t mean to pick a fight with McNabb,
who almost certainly doesn’t actually
write the
Chairman’s Letter
he signs in
every annual and semiannual report to
shareholders. But come on!
Morgan Growth’s managers haven’t,
as a whole, earned a performance bonus
since September 2010, and in the latest
six-month period (based on the prior
three years’ performance), they were
dinged $1.9 million, which is consid-
erable given that their all-in fees were
$8.5 million.
If Chairman McNabb, or, for that
matter, any ofVanguard’s directors were
shareholders in the fund and received a
semiannual report characterizing this
performance as “strong,” they might be
critical as well. But neither McNabb
nor any of Vanguard’s directors own
shares in the fund. Alfred Rankin, a
director since 1993, reportedly had
between $50,001 and $100,000 invest-
ed in Morgan Growth at the end of
2012, but apparently sold those shares
sometime in 2013.
The problem, as I’ve noted many
times, is that Morgan Growth suffers
from too many portfolio managers all
acting independently. The current roster
of five different investment firms and
nine different named portfolio manag-
ers is just too messy. If indeed all nine
REPORTS
Strong Language
Morgan’sManyManagers
3/90
3/92
3/94
3/96
3/98
3/00
3/02
3/04
3/06
3/08
3/10
3/12
3/14
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
rising line
=
fund outperforms Russell 3000 Growth Index
Roll & Ross
fired,
replaced by
Vanguard
internal
▼
▼
▼
▼
▼
▼
Morgan's
first two
"multi"
managers,
Franklin and
Roll & Ross,
added
Kalmar
and Frontier
replace Franklin.
Morgan now has
five managers.
Husic added as
fourth manager
Jennison hired as
fourth manager
Husic
fired
are making investment decisions for the
portfolio, then it’s no wonder that the
fund has been unable to outperform its
Russell 3000 Growth bogey for years,
as the chart to the left shows.
So is the fund’s latest six-month
performance strong? At the same time
that Morgan Growth’s latest report was
issued, McNabb uses the same adjec-
tive to describe
PRIMECAP Core
’s
six-month return of 14.64%, which was
222 basis points, or 2.22%, better than
its bogey, as well as
Capital Value
’s,
which was also ahead of its benchmark
by over 2%. And he uses no adjective at
all in noting that
Global Equity
“out-
paced” its benchmarks by more than
2%. In all three cases, I’d characterize
those returns as “strong.” But beating a
benchmark by a few basis points, like
Morgan Growth? Not so much.
I highly recommend you stay away
from this fund, which Vanguard labels
one of its “Select” funds. I’m not sure
how a fund earns the “Select” label, but
I wouldn’t let that guide my investment
choices.
n
Human sacrifice, dogs and cats living
together…mass hysteria!
—Dr. Peter Venkman
(Bill Murray), “Ghostbusters”
INVESTORS ARE CONDITIONED
to
expect stocks and bonds will move
in opposite directions. Coming into
2014, investors were pulling money
from bond funds and adding to stock
funds, on the expectation that if stocks
continued to move higher, bonds would
continue to decline.
So with positive returns out of
500
Index
,
up 7.0%, and
Total Bond
Market
up 3.9% so far this year, some
investors and commentators are left
scratching their heads—but should it
really be all that surprising?
The short answer is, “No.”
The table above considers rolling
returns for 500 Index and Total Bond
Market funds since the end of 1986. It
breaks out the percentage of time the
two funds moved higher or lower simul-
taneously or moved in opposite direc-
tions over several rolling time frames.
The first takeaway is that more often
than not (roughly 60%–70% of the time)
CORRELATION
Dogs and Cats Living Together
Not Unusual for Stocks and Bonds to
Gain Ground Simultaneously
Percent of the Time
3-Month
Rolling Returns
6-Month
Rolling Returns
12-Month
Rolling Returns
Both Positive
57%
61%
71%
500 Index Positive / Total Bond Market Negative
14%
12%
8%
500 Index Negative / Total Bond Market Positive
22%
23%
21%
Both Negative
7%
3%
0%
Time frame: 12/31/86–5/31/14; covers 327 rolling 3-month periods, 324 rolling 6-month periods, and 318 rolling 12-month periods.
