14
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Fund Family Shareholder Association
IT’S BEEN A BIT MORE
than a decade
since Vanguard shut the doors on
Capital Opportunity
for what would
turn out to be a nine-year closure before
reopening it briefly, then closing the
doors once again.
And, while I have nothing but praise
for the PRIMECAP Management team
and their stewardship of our money, I
think it’s important to recognize that,
as I’ve said for years now, the Capital
Opportunity of today is a far cry from
the fund it was in its early years. In fact,
despite some differences in portfolios,
the performance of Capital Opportunity
and
PRIMECAP
has been almost iden-
tical. Identically good, I should add.
From the end of March 2004, when
Vanguard closed the then-$7.4 billion
fund, through August 2014 Capital
Opportunity (now with $12.5 billion
in assets) has gained 185.6% versus a
180.6% gain for PRIMECAP, with its
$42.9 billion in assets.
In the meantime, PRIMECAP
Management’s private-label
Odyssey
Aggressive Growth
has continued on
the path of smaller-cap outperformance.
Since inception in November 2004 (just
eight months after Capital Opportunity’s
closure), the private-label fund is up
266.5% versus Capital Opportunity’s
177.3% gain over the same period.
Now, don’t get me wrong: No mat-
ter which PRIMECAP-run fund you
bought, you far outpaced the stock mar-
ket. (Don’t tell all those folks who believe
you can’t find great active managers,
please. Let’s keep this to ourselves.)
In fact, Capital Opportunity also per-
formed light years ahead of the small-
cap and mid-cap indexes, as well as
S&P MidCap 400 Growth ETF
since I
added it to our
Growth Model Portfolio
at the end of April 2012 in my desire
to add back greater mid-cap exposure.
As it turns out, no matter which portion
of the market you indexed, you just
couldn’t keep up with the great stock-
picking at Capital Opportunity (or the
other PRIMECAP-managed funds, for
that matter).
If you take a look at the chart on
page 15, you’ll see not only that the
relative performance between Capital
Opportunity andPRIMECAP flattens out
considerably after the 2004 closure (and
even more so after assets hit a peak in
2007), but also that Odyssey Aggressive
Growth has consistently outperformed
since its inception. (Note that the lon-
ger line rises when Capital Opportunity
is outperforming PRIMECAP and the
PRIMECAP
When One Fund Acts Like Another
The PRIMECAP Record
3/31/04–
8/31/14
10/31/04–
8/31/14
PRIMECAP
180.6% 168.3%
Capital Opportunity
185.6% 177.3%
Total Stock Market
129.7% 127.2%
Odyssey Agg. Growth
— 266.5%
VANGUARD.COM
Ghost in the Machine
SEND IN THE POLICE.
When is 1.2% the mid-point between
0.0% and 3.0%? For that matter, when
is 6.0% the mid-point between 0.0%
and 20.0%? How about never? The
mid-points are 1.5% and 10.0%, unless
you’re Vanguard.com’s interactive
“Principles for Investing Success” cost
calculator, that is.
My sharp-eyed Senior Managing
Editor, Billy Currano, found this bug
in Vanguard’s system this past month,
and Jeff DeMaso and I both confirmed
that Vanguard’s programmers need to
do a bit of tweaking if you’re to believe
the numbers the calculator shows.
In a nutshell, as you read through
Vanguard’s principles online, you’re
given a calculator that shows that
an investor with $10,000 who pays
1.2% in expenses and earns a 6.0%
return over 10 years will end up with
$12,349.43 while “losing” $3,588.00 to
expenses. The problem is, those num-
bers are wrong. Actually, the investor
would keep just $5,894.74 and lose
$2,013.73 to expenses. (At least that’s
what Vanguard’s calculator says once
you jigger with the dials to recalibrate
it.) And no, you won’t end up with
$547,612 after 50 years of investing
at 6% with a 1.2% expense ratio. The
numbers are a bit more, um, tame.
You’ll have $91,454.
I’m guessing Vanguard’s going to put
the fix in shortly, so hopefully, this partic-
ular error won’t pop up again. However,
the lesson learned is permanent: You can
trust, but you also have to verify. Even if
you paid nothing in expenses and earned
a 6.0% percent return, you’d only have
$184,201 at the end of 50 years, which is
a far cry from half a million.
n
Low Costs Are Good, But Not This Good
WHAT VANGUARD SAYS
THE REAL NUMBERS
Kept
Lost
Kept
Lost
1 year
$837.44
$162.56
$474.31
$125.69
5 years
$4,949.73
$1,155.37
$2,607.44
$774.82
10 years
$12,349.43
$3,588.00
$5,894.74
$2,013.73
25 years
$64,673.43
$33,673.63
$21,851.79
$11,066.92
50 years
$547,612.04
$616,296.49
$91,453.64
$82,747.90
Note: Assumes 6.0% annualized return and 1.2% expense ratio.
