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The Independent Adviser for Vanguard Investors

January 2016

3

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not only did Vanguard assure him that

they’d take care of his distributions, but

when it wasn’t done, they sent him the

forms they needed, then told him he

wouldn’t make the end-of-year cutoff

and would owe IRS penalties. Happy

NewYear?

Vanguard is proposing to launch

an actively run bond fund called

Core

Bond

during the first quarter of 2016.

The fund will have a trio of Vanguard

veterans at the helm, building the port-

folio with both investment-grade and

non-investment-grade bonds. Junk

bonds will be layered in at up to 5%

of assets, while what Vanguard calls

“medium quality” bonds will take up as

much as 30% of assets. Up to 10% of

the fund can be invested in non-dollar-

denominated bonds.

I think this new fund has the poten-

tial to outshine Total Bond Market

Index over time. But I wouldn’t rush

into it, as I think it will take some

assets to build the diversified portfo-

lio Vanguard needs to make the fund

shine.

Why do I think this fund will do

well? First, three accomplished man-

agers will run it. Second, Vanguard

keeps very tight reins on its active bond

funds, prescribing limits on the amount

of duration or risk the managers can

take vis-à-vis their benchmarks, as

well as how far outside the benchmark

the managers can go when search-

ing for bonds. So add all that up with

expense ratios that are just 5 to 8 basis

points higher than Total Bond Market’s

comparable-share-class expenses, and

you’ve got a pretty low hurdle for the

managers to exceed.

Vanguard also has filed to offer an

active emerging markets bond fund,

but there’s a catch.

Emerging Markets

Bond

, to be run by Daniel Shaykevich,

a former member of BlackRock’s EM

debt team who’s been at Vanguard for

a few years, will be more diversified

than

Emerging Markets Government

Bond Index

and is supposedly going to

offer up Investor and Admiral shares.

However, Vanguard says the

fund will not be “available

for immediate public invest-

ment.”

That could mean many

things. It’s worth noting that

Vanguard Chairman Bill

McNabb recently wrote that

investing in emerging markets

is “only suitable for those will-

ing to accept a higher level of volatility

than one might expect from developed

markets.” Hardly an earth-shattering

insight, but it does reflect Vanguard’s

thinking on the subject.

One thought I have is they’ll seed

the fund by offering it only to investors

who are part of their advisory service

program. Once it’s got sufficient assets,

then they’ll open it up to the public.

We’ll just have to wait to see what’s up

with this new active emerging markets

bond offering.

Some of you asked about the

Capital

Value

trade I made in September. Over

the past three months, the fund is up

5.7% versus Total Stock Market Index’s

6.2% gain. Remember that this is a

long-term strategy and is based on buy-

ing when Capital Value is

not

perform-

ing as well as the market. Since you

can’t catch the bottom, you have to take

a long-term view here. I’m sticking

with the strategy.

Also, the 2016

Hot Hands

fund is

International Explorer

. I’ll have the

details on the

Hot Hands

strategy next

month, but the strategy aims to identify

hot funds—and with an 8.6% gain in

2015, International Explorer is a “hot”

fund in a “cold” market space (foreign

stocks).

Finally, let me put a plug in for what

may be the best financial book of the

year,

The Devil’s Financial

Dictionary

. Written by my

friend Jason Zweig, this funny

and acerbic take on Wall

Street jargon and hypocrisies

belongs on every investor’s

and would-be investor’s desk.

If FedEx or UPS botched

your holiday gift-giving and

you’re looking for something

better than that faux-leather bow tie

you’ve been trying to return, buy this

instead. You won’t be sorry.

n

MEANDERING

FROM PAGE 1

>

2015 Scoreboard

End 2015 Change 2015

Dow Jones

17425.03

-2.2%

S&P 500

2043.94

-0.7%

NASDAQ

5007.41

5.7%

Russell 2000

1135.89

-5.7%

Stoxx 600

365.81

6.8%

London

6242.32

-4.9%

Frankfurt

10743.01

9.6%

Tokyo

19033.71

9.1%

Shanghai

3539.18

9.4%

Hong Kong

21914.4

-7.2%

Sao Paulo

43349.96

-13.3%

Gold (oz.)

$1,060.50

-10.4%

Oil (bbl)

$37.10

-30.4%

Nat. Gas (MMBtu)

$2.35

-19.8%

3-mo. T-bill

0.17% up 13 bp

10-yr. T-bond

2.27% up 10 bp

30-yr. T-bond

3.02% up 27 bp

Fed funds

0.50% up 25 bp

Euro

$1.086

-10.2%

Yen

$0.008

-0.3%

Renminbi

$0.154

-4.4%