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Fund Family Shareholder Association
www.adviseronline.comshort, Dan and I see more oppor-
tunity than danger in the high-yield
bond space.
Conservative Allocation Annuity
Hold.
Introduced in 2011,
Conservative Allocation Annuity is
an all-index fund-of-funds targeting
a 40% stock, 60% bond allocation.
The 60% allocation to bonds is split
between
Total Bond Market Annuity
and
Total International Bond Index
.
Interestingly, unlike nearly every other
portfolio where Vanguard blends togeth-
er domestic and foreign bond index
holdings, only 20%, not 30%, of the
bond allocation is going toward over-
seas bonds. Filling out the stock portion,
Equity Index Annuity receives 23% of
assets,
Total International Stock Index
gets 12% and a bit more than 5% goes to
Extended Market Index
.
This is one of three options for those
who want to access the “Guaranteed
Lifetime Withdrawal Benefit” rider.
That may be attractive to some, but,
as discussed earlier, it comes at a high
cost. I think investors can do better fol-
lowing one of the
Model Portfolios
or
building their own conservative annu-
ity portfolio using some of the active-
management jockeys available here.
Moderate Allocation Annuity
Hold.
Moderate Allocation
Annuity
, which turns five in October,
is an all-index fund-of-funds target-
ing a 60% stock, 40% bond alloca-
tion. Like its more conservative sibling,
the 40% allocation to bonds is split
between Total Bond Market Annuity
and Total International Bond Index, but
the foreign bond portion only accounts
for 20% of the bond sleeve. Filling
out the stock portion, Equity Index
Annuity receives 34% of assets, Total
International Stock Index gets 18%,
and 8% goes to Extended Market Index.
The reason to invest here would be
to access the “Guaranteed Lifetime
Withdrawal Benefit” rider. Again, I
think investors can do better following
the
Model Portfolios
, or, heck, the next
annuity, which is a better alternative for
an investor looking for a stock-tilted
balanced portfolio.
Balanced Annuity
Buy.
This is a
Wellington
clone, with
about two-thirds of its assets in divi-
dend-paying, large-capitalization stocks
and the remainder in intermediate-term
bonds. If you’re looking for a straight
balanced fund, look no further. As you
can see in the first chart above, since
the index-based Moderate Allocation
Annuity’s inception,
Balanced Annuity
has consistently outpaced its younger
sibling. And I thought active manage-
ment didn’t work?
Capital Growth Annuity
Buy.
With PRIMECAP Management
running this portfolio unfettered, this
is by far the best of Vanguard’s annu-
ity options.
Capital Growth Annuity
used to be what I called a fraternal twin
to
PRIMECAP
. It now moves almost
like a clone. What I can’t get my head
around is why this fund remains the fifth
smallest annuity in terms of assets—
over the past 10 years it has been the best
performing annuity, gaining 8.6% a year.
The next closest? Equity Income with a
7.4% annual return. If I owned an annu-
ity (and I don’t), I’d consider putting all
my money here.
Diversified Value Annuity
Buy.
This is the concentrated version
of
Windsor II
. And as with Windsor
II, longtime manager Jim Barrow of
Barrow Hanley stepped away from the
portfolio at the end of the year, handing
the reins over to his two handpicked
successors: Jeff Fahrenbruch and David
Ganucheau. Only time will tell if they
are able to fill Barrow’s shoes.
As I mentioned, Windsor II and
Diversified Value Annuity
differ in
their level of concentration. Where
Vanguard has hired five different firms
(including Barrow Hanley) to manage
pieces of Windsor II, Barrow Hanley
is the only firm calling the shots at
Diversified Value Annuity. And despite
its higher expenses, Diversified Value
Annuity has outpaced Windsor II, no
matter how many managers Vanguard
added to make the older fund “better.”
I expect Fahrenbruch and Ganucheau
to continue practicing Barrow’s
approach of holding around 45 stocks
with roughly one-third of assets in the
top-10 picks while keeping trading to
a minimum. Though managed in the
Windsor II style, focusing on large-cap
value stocks, this annuity can be used
as an imperfect substitute for
Selected
Value
in my
Model Portfolios
.
Equity Income Annuity
Buy.
Though it wasn’t always the
case, this fund has been a clone of
Equity Income
for over a decade. At
first, original Equity Income manager
Newell Associates ran the annuity solo.
But in August 2003, Newell was fired
and replaced byWellingtonManagement
and Vanguard’s in-house equity group. It
took several years for the two funds to
draw closer, but they have been essen-
tially the same for the past decade, with
the annuity lagging under the weight of
higher overall expenses.
In the past, I preferred the stock-pick-
ing skills of Jim Barrow at Diversified
Value Annuity. I still lean that way,
but with Barrow gone, I’m watching
>
Jim Barrow Solo vs.
Windsor II
12/00
12/01
12/02
12/03
12/04
12/05
12/06
12/07
12/08
12/09
12/10
12/11
12/12
12/13
12/14
12/15
Rising line = Div. Value Annuity beats Windsor II
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
Firm hired
Firm fired
▼
Hotchkis
and Wiley
hired at
Windsor II
▼
Armstrong
Shaw hired
at Windsor II
Lazard hired,
Equinox and
Tukman both
fired at
Windsor II
▼
▼
Sanders Capital
hired at Windsor II
▼
Armstrong
Shaw fired
at Windsor II
Balanced Annuity:
Active Beats Passive
12/11
6/12
12/12
6/13
12/13
6/14
12/14
6/15
12/15
Rising line = Balanced Annuity outperforms
Moderate Allocation Annuity
0.96
0.98
1.00
1.02
1.04
1.06
1.08
1.10
1.12