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The Independent Adviser for Vanguard Investors

January 2016

15

FOR CUSTOMER SERVICE, PLEASE CALL

800-211-7641

even higher for other retirement plans

(see the table on page 13). If you are

over 50 or are turning 50 this year, take

advantage of the option. And if you

didn’t do so in 2015, you still have until

April 15, 2016, to make the most of

this fantastic feature. (In 2015, the limit

was the same, $5,500 plus an additional

$1,000 catch-up.)

If you’re newly eligible for the catch-

up contributions, talk to your company’s

Human Resources or employee benefits

department about your in-house retire-

ment account and make sure that they’ll

accommodate you. While employers

are not required to allow the catch-up

contributions, most should be with the

program by now.

Regardless of your age or income

level, you should strongly consider

making your 2016 contributions now,

rather than later. But, if you still haven’t

done all you can for 2015, do that first,

before the opportunity to contribute

ends on April 15, 2016. Retirement

accounts are great long-term savings

and investment vehicles, and regular

contributions, when properly invested

in, say, one of my

Model Portfolios

,

will really add up over time.

n

I’MALWAYSAMUSED

by the ways that

Vanguard justifies the often poor per-

formance of its multimanaged funds.

The latest comes from Bill McNabb’s

chairman’s letter in

Morgan Growth

’s

2015 annual report. In the course of

three paragraphs, Morgan Growth

shareholders are told that the fund’s

multimanager strategy “provides diver-

sification, which can mute some of the

volatility associated with the stocks of

fast-growing companies.”

Then shareholders are told that the

fund lagged its benchmark (the Russell

3000 Growth index) by more than 0.5%

per annum over the past decade. That’s

followed by a note that the past six years

have been good ones, because the fund

was up in each of its last six fiscal years,

and that the fund’s “multi-manager advi-

sory team deserves credit for delivering

these solid long-term results.”

Technically, McNabb (or the person

who penned this letter for him) is correct.

Morgan Growth did underperform its

benchmark by 0.64% per annum, 7.41%

to 8.05%. And yes, it did report gains in

each of its last six fiscal years. What’s

left unsaid is that the fund also lagged

its benchmark over that six-year period.

And that ignores the fact that an

investment in another growth fund with

a single management team at the helm,

PRIMECAP

, generated a 9.0% return

over the same 10 years, or nearly a full

percentage point ahead of the index,

which, as we know, is unencumbered by

expenses.

As for multimanagers reducing

volatility, I can tell you that over the

full decade, Morgan Growth’s volatil-

ity relative to the S&P 500 was about

1.09, while that of, say,

Growth Index

was 1.03, and PRIMECAP’s was 1.02.

Plus, while some investors might be

interested in this Greek alphabet soup

of risk statistics, Morgan Growth’s

maximum drawdown, or loss, of 50.3%

during the financial crisis was greater

than Growth Index’s 47.2% decline and

PRIMECAP’s 44.3% drop.

I stand by my research and my long

perspective on multimanaged funds:

Most of the time, they don’t improve

performance, and they also don’t reduce

risk. Over a 10-year period, if a hodge-

podge of managers really were able to

reduce risk, it would stand to reason that

even a bit of sub-par performance would

win the long-term race, since recoveries

from smaller drawdowns would give the

active managers a fighting chance. That

isn’t the case at Morgan Growth.

And in a Postscript

Not only did Vanguard Chairman

McNabb miss the point on Morgan

Growth, he also, in my view, misled

shareholders in

Growth & Income

,

another fund that recently issued its

own annual report. McNabb tells share-

holders, “The fund’s three advisors

have seen success over time,” and goes

on to say that Growth & Income’s

10-year return of 6.16% was close to

that of its S&P 500 Index benchmark

(up 6.80%) and also ahead of peers.

And he adds that the fund has “outdis-

tanced” the S&P 500 in each of the last

five years.

I found just one problem with this:

Not one of the teams running Growth

& Income today was on board 10 years

ago. In fact, they weren’t even on board

five years ago. All three management

teams joined Growth & Income when

the fund was overhauled in 2011, so

they’ve only been running the fund

for four years. McNabb’s ghostwriter

should have checked Vanguard’s web-

site, or my annual

Independent Guide to

the Vanguard Funds

.

To write that “[w]e expect this mul-

timanager approach will continue to

provide competitive returns over the

long term” is to ignore the facts. Once

again, the attempts to cast a positive

spin on multimanagement get in the

way of the truth.

n

QUOTABLE

Morgan’s Multiple Manager Mess

A Decade of Underperformance

Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 10 Years

Morgan Growth

8.2% 21.2% -23.7% -4.3% 12.8% 0.7% 27.2% 20.7% 16.8% 4.8% 7.4%

Russell 3000 Growth Index

6.1% 19.3% -20.6% -2.2% 12.8% 3.4% 29.3% 20.3% 17.9% 3.2% 8.1%

Growth Index

6.1% 19.2% -19.0% -3.8% 12.6% 2.7% 31.1% 18.5% 19.1% 1.8% 7.9%

Note: Table shows 12-month returns through dates listed; 10 Years column shows 10-year annualized return through 9/30/15.