(PUB) Vanguard Advisor - page 91

The Independent Adviser for Vanguard Investors

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June 2014

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to be that the West was screwed; it was all about emerging markets—it is

now a bit more balanced. We see opportunities all around the world.

You were sounding a pretty bullish note on the emerging markets

two years ago, but not so much today.

For at least two years we tended to be net sellers in places like Brazil

and South Africa. The West has been doing better than we thought, and

there’s a broader range of opportunities now, so we wanted to broaden

the portfolio. At the moment we are window shopping in EM. We are

looking for the next generation of emerging market opportunities. We are

not yet at the point where we are prepared to put more money to work,

but we are monitoring very closely. We are actually quite excited about

Africa. It’s driven by things like mobile payments and mobility and smart

phones and so on. Africa doesn’t have the infrastructure, but it does have

internet connections and wireless connections. We are not yet invested,

but we are going on trips, and we are searching.

Last year, you made your first trip to India and came away with

an upbeat outlook on the country’s prospects. How has that been

expressed in the portfolio?

We’ve got about 1% of the portfolio invested in India now. We came

back—last autumn, actually in a period where the market was panicking

about India, we bought ICICI Bank, which is one of the two largest private

sector banks in India. It gives us a generic exposure to an economy that

we think is at an attractive point in its cycle.

The recent election promises big change if the new president

can do for the country what he did in his state.

That is absolutely right. Here is someone who can actually make

things—you know, there is so much skepticism in India because it has

disappointed for 40 years. So we didn’t buy our Indian bank share for a

six- or 12-month view. We bought it to be there for the next 10 years.

Even though yields in peripheral Europe are back in line with other

developed countries and there are signs of economic growth, the

European Central Bank (ECB) may ease further. Is it necessary?

We invest in companies, not the ECB. Many of the world’s best busi-

nesses are based in Europe. We don’t have significant exposure to the

domestic European economy. Our stocks tend to be global companies. So

we have relatively little exposure to European demand.

Whether monetary policy is getting a bit looser or a bit tighter, the fact

is that Europe is going to grow more slowly than much of the rest of the

world because it has structural problems, in addition to financial, you

know, debt issues. We’ve got demographic issues. We’ve got political

issues. So Europe is going to be a relatively slow-lane region.

At the very, very margin, we did buy a small investment in the Bank of

Ireland about a year ago as a sort of geared exposure to fringe Europe.

So far that has been a very pleasant experience. We don’t spend any

time considering what the ECB will or won’t do—or indeed the Fed, even

in the U.S.—that’s not what we are looking at. We are trying to take a

big view. For any individual company, is the operating environment going

to remain satisfactory or is it going to get better? As long as we can say

yes, then we will consider investing in it.

Do you invest in the Global strategy?

Yes. For all three of the fund managers on this team, Global Alpha is

our single largest financial asset.

Thank you, Charles.

Note: A longer version of this Interview appears at

www.adviseronline.com

History says it could, but that would

only make 2014 a normal year for

small-cap stocks.

Is Bigger Better?

With investors’ recent turn to larg-

er fare, you may be wondering how

large-caps compare on this score. The

second graph on the right plots the

same exercise for 500 Index, which

has averaged a 14.8% drawdown over

the same 24-year period. But, again,

despite the inevitable declines, stocks

have delivered positive returns far

more often than not. With an average

calendar year return of 11.0%, 500

Index has notched positive returns in

19 of 24 years.

How does an active manager com-

pare? Looking back at

PRIMECAP

over the past 24 years, the average

intra-year decline of 16.3% was actu-

ally a touch steeper than 500 Index’s.

But, once again, investors have been

well rewarded for sticking through

drawdowns as PRIMECAP gained

ground in 19 of the 24 calendar years

with an average return of 14.7%—

better than 500 Index or SmallCap

Index!

As investors, acknowledging that

declines are a normal part of being in

the markets better prepares us to stay the

course when the next correction arrives.

Our holdings in funds like Capital

Opportunity or

Selected Value

, which

hold a smattering of smaller stocks, or

large-cap funds like Dividend Growth

may be buffeted by the vagaries of the

day-to-day markets, but they remain

some of Vanguard’s best funds. Stick

with them.

A (Near) Bear Market Every

Year in Small Stocks

12/91

12/93

12/95

12/97

12/99

12/01

12/03

12/05

12/07

12/09

12/11

12/13

-60%

-40%

-20%

20%

40%

60%

Calendar-Year Returns

Intra-Year Declines

Avg. Calendar-Year Return

Avg. Intra-Year Decline

Large Stocks Take

Hits, Too