(PUB) Investing 2016

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6 • Fund Family Shareholder Association
index has led and times where it has
lagged, but over the past decade or so, its
performance hasn’t been all that different
from either Total International Stock
Index or Developed Markets Index,
and lately it has been underperforming.
International High Dividend Yield
Index aims to track a brand new index,
the FTSE All-World ex-U.S. High
Dividend Index. As with any fund that
doesn’t look quite like the market, you
can expect periods when International
Dividend High Yield Index will outper-
form and periods when it will underper-
form the traditional foreign index funds.
But why rush in here when we have a
proven option in International Growth?
What Vanguard isn’t doing is offering
actively managed counterparts to these
funds, as they do domestically. Dividend
Growth and Equity Income are both
benchmarked to the same indexes used
by the domestic DividendAppreciation
Index and High Dividend Yield Index
funds. And the active managers have run
circles around their index competitors.
New Bond Funds
Let’s turn to the more traditional
sources of income—bonds. Emerging
Markets Bond was launched with lit-
tle fanfare in early March. The fund
is run by Dan Shaykevich, a former
member of BlackRock’s emerging mar-
kets debt team, and will go toe-to-toe
with Emerging Markets Government
Bond Index. Though the fund’s
Investor and Admiral shares have been
pricing since early March, neither are
available for purchase today. Vanguard
says that a Vanguard subsidiary is the
“sole investor in the fund” as Vanguard
wants to “confirm our active emerg-
ing market capabilities,” which I guess
means they want to make sure they
know what they’re doing in the space.
The final new fund, and the one I’m
most interested in, is Core Bond, man-
aged by a trio of Vanguard managers. The
fund will go head-to-head with the largest
bond fund in the world—Total Bond
Market Index. As Core Bond is less than
a month old, Vanguard is not reporting
any portfolio data for the fund, but expect
it to invest in investment-grade-rated gov-
ernment, agency and corporate bonds.
Vanguard’s marketing focus on its
indexed bond funds, in particular Total
Bond Market Index, has overshadowed
the excellent performance of its active
funds, like Short-Term Investment-
Grade and Intermediate-Term
Investment-Grade. Core Bond has
the potential to outshine Total Bond
Market Index over time. But I wouldn’t
Foreign “Achievers” Show
Similar Performance
12/0512/0612/0712/0812/0912/1012/1112/1212/1312/1412/15
Rising line = Dividend Achievers Index outperforms
Int'l Dividend Achievers vs. Total Int'l Stock
Int'l Dividend Achievers vs. Developed Markets
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
rush into it, as I think it will take some
assets to build the diversified portfolio
Vanguard needs to make the fund sing.
Still, I rate it Buy and think this fund
will do well. First, three accomplished
managers will run it. Second, Vanguard
keeps very tight reins on its active bond
funds, prescribing limits on the amount
of duration (risk) the managers can take
vis-à-vis their benchmarks, as well as
how far outside the benchmark the man-
agers can go when searching for bonds.
Add all that up with expense ratios that
are just five to eight basis points higher
than Total Bond Market’s comparable
share-class expenses, and you’ve got a
pretty low hurdle for the managers to
clear to prove their security-selection
chops.
In the end, Vanguard is broadening
its income solutions with these four
funds, though none of them is a must-
own today. I’ll keep you apprised as we
see how they perform. n
MANAGED PAYOUT
More of a Return of, Rather than a
Return on Your Money
ONE CHANGE AT VANGUARD is no change
at all. Managed Payout’s 2016 monthly
distribution is unchanged from 2015, at just
a little under six cents per share ($0.0589)
after a small increase last year. However,
Vanguard now says that 67% of that distri-
bution is a return of capital, versus about
57% last year. What this means is that
Vanguard is unable to generate enough cur-
rent income to keep the distribution even
without dipping into capital.
Those numbers could change if the fund
starts generating more income as the year
proceeds, but in my eyes, Managed Payout
remains a lousy investment.
Not a single Vanguard director owns the fund, nor has one ever owned the fund or its
predecessors. If the Vanguard board doesn’t see fit to put a single, solitary dollar into this
portfolio, why would you? The fund has the single worst record among Vanguard’s bal-
anced funds and has generated less than half the total return of Wellesley Income since
inception. In fact, Vanguard’s disclaimer on Managed Payout is longer than that for any
other fund except Market Neutral—which, of course, is a component of the Managed
Payout fund.
Investors haven’t been fooled. The fund is barely taking in new money, and assets have stag-
nated at about $1.6 billion—hardly a roaring success.
>
Managed Payout Assets
Are Stagnating
1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/16
Discontinued Managed Payout Portfolios
Managed Payout
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000