14
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Fund Family Shareholder Association
active funds more index-like (or
worse) over time.
As far as I’m concerned, the direc-
tor with the best record of the bunch
is Peter Volanakis, former president
and CEO of Corning. He owns a lot
of Vanguard funds, meaning his for-
tunes, to a greater or lesser extent,
ride alongside fellow shareholders.
Volanakis holds positions of $100,000
or more in 21 different funds, and also
owns one other fund on top of that.
Even Chairman McNabb isn’t keeping
pace—he has “over $100,000” posi-
tions in 20 funds.
On the other end of the scale is
André Perold, who despite hav-
ing been paid more than $1.6 mil-
lion in fees since joining Vanguard’s
board in 2004, has only invested in
two Vanguard funds,
500 Index
and
Convertible Securities
, and his hold-
ings in the convertible fund are in the
$10,001 to $50,000 range.
Show Us the Money
Why the focus on directors and
their holdings? According to some at
Vanguard, this kind of deep dive into
how the directors invest is the stuff of
tabloid journalism. It’s no one’s busi-
ness but the board members’, they’d
say. But is it, really? According to
former SEC chairman Arthur Levitt,
“Being on a mutual fund board is the
most comfortable position in corporate
America.” Maybe a little discomfort,
and disclosure, is what Vanguard’s
board—and all boards—need. If all
of Vanguard’s funds were producing
tip-top returns, I’d back off. But they
aren’t. And who’s in charge of all that?
The directors.
As I have argued many times,
Vanguard’s directors need to do a bet-
ter job of eating their own cooking if
we’re to believe they have sharehold-
ers’ best interests at the top of their
minds. How is it, for instance, that the
directors took so long to finally boot
AllianceBernstein from
U.S. Growth
,
or Turner Investments from
Growth
Equity
, two woeful dogs of funds that
had virtually zero representation in the
board’s personal portfolios? Would
greater ownership in
Windsor II
have
led to a revamping of the managers there
sooner? Or how about those woeful
Managed Payout
funds? Not a single
director owned shares there. Would they
have acted sooner to recast the funds if
personal money had been at stake?
Did the directors take their eyes
off the ball? Not being privy to board
minutes, I can’t say. But had their
own fortunes at least been subject to
some of the long periods of underper-
formance or horrendous losses these
funds produced, maybe they wouldn’t
have taken so long to make changes.
While we’re on the subject, it’s also
time that Vanguard took a leadership
position in its industry and paid direc-
tors in shares of the funds they oversee,
rather than in cash—something I’ve
advocated forever, but which gets no
traction in a fund industry that would
rather hide behind the banner of per-
sonal privacy than fly the flag of full
disclosure. Public companies do it.
In fact, they often pay directors and
executives more in their own shares
than they do in cold, hard cash. Is it
too much to ask that directors’ financial
interests (and I’m not talking about just
their annual fees) be aligned with those
of investors in the funds they purport to
keep watch over?
Again, Peter Volanakis is the kind of
director all fund boards should be seek-
ing, as his investments in Vanguard
funds far exceed the amount he’s
been paid in fees. And let’s not for-
get Vanguard Chairman Bill McNabb,
who hasn’t come close to matching his
predecessor Jack Brennan’s holdings
in more than 40 funds. McNabb is a
shareholder in just 22.
Ask yourself, are Vanguard’s “kings
and ministers,” as economist Adam
Smith would call them, eating their
own cooking, or simply dining on a
few funds while serving up the “private
people” with nary a nibble?
n
CAN MULTIMANAGEMENT WORK?
Most of the time I’m not a believer,
but in the case of
Emerging Markets
Select Stock
, the early results are good,
and instructive.
The fund passed its three-year
birthday in mid-June, and so far the
combination of four management
teams consisting of seven managers
(not including the underlying team
of global industry analysts managed
by Wellington Management’s Cheryl
Duckworth) is outperforming the pas-
sive
Emerging Markets Index
. That
said, it hasn’t been an easy three years
for either fund.
First, the good news. As you can
see in the first chart on page 15, the
active fund has definitely outperformed,
with a total gain from inception through
June of 9.3% compared to the index
fund’s 0.1% loss. Now, those are total
gains, not annualized gains. As I men-
tioned, it hasn’t been a great three years.
To put it into perspective,
Total Stock
Market
is up 62.4% over the same
period. Emerging Market Select Stock’s
performance is testimony to good stock-
picking on the part of some or all of the
managers on the fund, as well as an abil-
ity to invest beyond the parameters that
constrain the index fund. More on that
in a moment.
EMERGING MARKETS
Active Management Wins, So Far
>
Despite having been
paid more than
$1.6 million, director
André Perold is
invested in just two
Vanguard funds.
