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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.