The Independent Adviser for Vanguard Investors
•
May 2014
•
15
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doing as well as it appears when taxes
are taken into account.
A final caveat:
For investors in
tax-deferred accounts like an IRA,
the issue of tax efficiency is large-
ly irrelevant
. This means that you
shouldn’t avoid a fund like Convertible
Securities simply because it is tax-inef-
ficient; rather, you should look to hold
it in your IRA instead of your taxable
account if its objectives meet yours.
While some funds are better suited
for tax-deferred accounts, other funds
can be appropriate in either situation.
Several of the funds in our
Model
Portfolios
fared very well both before
and after taxes, including
Capital
Opportunity
,
Selected Value
and
Dividend Growth
.
What about ETFs?
ETFs have long been touted as
the most tax-efficient way to invest.
However, more than three years ago I
showed you some preliminary data to
indicate that ETFs might not be any
better at keeping taxes at bay than a
regular old open-end index fund. In
fact, I told you that in some cases the
old format was better than the new.
Well, with many more years of data
now available, I’d say it’s pretty conclu-
sive that from an investor’s tax perspec-
tive, the ETF has no particular advan-
tage over the open-end index fund.
And
vice versa
. In the table on page
14, I’ve grouped the sibling ETFs and
index funds with the ETF listed first.
Running down the table you’ll see that
sometimes on an after-tax basis the
ETF comes out slightly ahead. At other
times, it’s the mutual fund. Most impor-
tantly, the differences are measured in
basis points, or hundredths of a percent.
To me, owning an ETF over an index
fund, or
vice versa
, is a toss-up. So, if
you hear someone extolling the virtues
of a Vanguard ETF over a Vanguard
index fund for its tax efficiency, pull
this table out. The argument doesn’t
hold water.
n
AS I NOTED LAST MONTH,
Vanguard
took a step in the right direction in
March when it cut one manager from
Windsor II
’s roster, but the fund is still
too manager-heavy for my tastes.
Vanguard announced the firing of co-
manager Armstrong Shaw Associates
on March 1, dropping the firm in favor
of a slightly greater concentration of
assets among the fund’s remaining five
co-managers. Armstrong Shaw’s 4%
portfolio allocation was handed over to
Hotchkis & Wiley, which will now run
about 11% of the mega-fund.
This is a good first step towards
returning Windsor II to some form of
performance prominence, but it isn’t
enough. Vanguard funds with lots and
lots of managers simply don’t perform
as well as their trimmer counterparts.
(
Explorer
and
Morgan Growth
quick-
ly come to mind, and
U.S. Growth
with
its new five-team approach is but the
latest offender.)
Of course, Vanguard’s spin on this
change was that it was giving a “bigger
role” to the managers at Hotchkis &
Wiley. That’s not quite the same as say-
ing they are reducing the head count on
the fund, or firing a manager for lousy
numbers—surprise, surprise. Vanguard
continues to claim that multimanage-
ment works, but the numbers show that
it doesn’t. In the chart above, you can
see that Windsor II has mostly lagged its
Russell 1000 Value Index bogey since
March 2009, with just two short bursts
of outperformance over the period.
Otherwise, it’s been a me-too kind of
performer.
Meanwhile, Jim Barrow has outper-
formedWindsor II, which he runs a piece
of, with
Diversified Value Annuity
,
which he manages solo, despite a higher
expense ratio (0.65% for the annuity
versus 0.36% for Windsor II).
Armstrong Shaw Shrinks
While this won’t matter to Vanguard
5 Years atWindsor II
3/09
9/09
3/10
9/10
3/11
9/11
3/12
9/12
3/13
9/13
3/14
rising line
= Windsor II outperforms
0.93
0.94
0.95
0.96
0.97
0.98
0.99
1.00
1.01
1.02
1.03
1.04
1.05
Windsor II vs. Russell 1000 Value
Windsor II vs. Value Index
Windsor II vs. 500 Index
shareholders, one consequence of
Vanguard’s move is that it is a crushing
blow to Armstrong Shaw, where more
than two-thirds of the firm’s assets were
the monies managed for Vanguard. At
year-end, Armstrong Shaw reported
a bit more than $2.7 billion under
management. Running about 4% of
Windsor II’s $47.4 billion, or $1.9
billion, means that about 70% of the
firm’s money is now gone. (I’ve based
this data on year-end SEC filings.)
The change to Windsor II’s lineup
makes the fund more acceptable, but
it certainly won’t make it exceptional.
But that may be just what Vanguard is
aiming for.
n
JimBarrowSolo vs. Windsor II
3/99
3/01
3/03
3/05
3/07
3/09
3/10
3/11
3/12
3/13
3/14
rising line
= Div. Value Annuity beats Windsor II
Hotchkis
and Wiley
hired at WII
▼
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
▼
Armstrong
Shaw hired
at WII
▼
Lazard hired,
Equinox and
Tukman both
fired at WII
▼
Sanders Capital
hired at WII
▼
Armstrong
Shaw fired
Diversified Value Annuity vs. Windsor II
MANAGERS
Windsor II Slims Down
