(PUB) Investing 2016

The Independent Adviser for Vanguard Investors

•

June 2016

•

FOR CUSTOMER SERVICE, PLEASE CALL

800-211-7641

come, but also limit the potential for

good ones.

So why would Vanguard be happy

with this tradeoff? Well, it all comes

back to Vanguard’s low-cost advan-

tage. Remember, the logic behind an

index fund is that after fees, you’ll

come out ahead of the average actively

managed competitor, because in aggre-

gate, the active funds are the market.

Vanguard’s low costs apply to its active

funds as well as its index funds. So if

Vanguard’s multimanager active funds

just act like the index, then they too

will come out “above average” after

fees. Consider that Explorer has out-

performed a third of its peers over the

last five years but, as the chart on page

4 shows, has clearly lagged its index.

8. If you look to Vanguard for advice,

they won’t suggest their best funds—

and may even tell you to sell them if

you already own them.

Vanguard has made an enormous

push to be your personal invest-

ment manager of choice through its

Vanguard Personal Advisor Services

(PAS) option, a pseudo-robo adviser.

Despite having “personal” in the name,

if you pop the hood on any PAS portfo-

lio, chances are it’ll look a lot like one

of the

Target Retirement

STAR

LifeStrategy

funds. The four “core”

total market index funds will dominate

the portfolio. What’s personal about

that?

Or consider Vanguard’s “Select”

funds. If you expected to see the

likes of Don Kilbride, Jean Hynes

or the PRIMECAP Management

team among Vanguard’s top picks,

you’re in for a disappointment. Which

actively managed U.S. stocks make

the cut? Explorer,

Morgan Growth

and

Windsor II

—all of which have

at least four different firms running

a piece of the portfolio. Remember

what I said about larding up funds

with too many managers? What do

you think happens when you lard up

an entire portfolio of funds with too

many managers?

And I don’t know how anyone look-

ing at the funds side by side selects

Balanced Index

over

Wellington

—

see the relative performance chart

above—but that’s just what Vanguard

has done time and again for its clients.

This from the firm that supposedly

knows these funds the best.

9. Vanguard pushes investors to buy

Total Bond Market Index, but even

Jack Bogle thinks it’s too risky.

Total Bond Market

, with $250

billion in assets,

is the largest bond

fund in the world. Broadly diversi-

fied, it serves as a one-stop shop for

bond exposure. It also plays a lead-

ing role in balanced portfolios run

by Vanguard, in everything from the

Target Retirement series and STAR

LifeStrategy

funds to portfolios man-

aged by Vanguard Personal Advisor

Services.

For years, Dan and I have been tell-

ing you that the overweight to Treasurys

in this index fund was bad for your

financial health, and a good dose of

corporate and municipal bonds would

improve your performance without

adding undue risk. A couple of years

back, Jack Bogle echoed our stance in

an interview with ETF.com.

“I go to basically short-term and

intermediate-term municipals in my

personal account, and, in my retirement

plan account, which is my largest asset

here, I use intermediate-term corporate

and short-term corporate debt,” he said.

Why does Bogle do this?

“The bond index is much more heav-

ily weighted in government debt—72

percent—than most investors need to be.”

We share his concern. Treasury bonds

are the most sensitive to changes in inter-

est rates. As they come to represent more

and more of Total Bond Market’s total

assets, the fund’s interest-rate risk creeps

up. But no one’s warning you about that

except us, and now Bogle as well.

It’s not as if Vanguard lacks

other options;

Intermediate-Term

Investment-Grade

, to name just one,

makes a great high-quality core bond

holding without the heavy slug of

Treasurys. Time will tell, but Vanguard’s

freshly launched

Core Bond

may be

another in-house actively managed bond

fund that beats Total Bond Market. Still,

Vanguard’s belief in indexing means

that it keeps pushing investors to “set it

and forget it” with Total Bond Market

Index despite the risks.

10. Vanguard’s low-cost ethos often

leads to inferior service.

Vanguard’s operations are running

with roughly the same full-time head

count it had in the early 2000s, when

assets were a quarter of today’s level.

In recent years, Vanguard has restruc-

tured its

Partnership

Plan

to reduce

payouts to workers in many positions,

restructured job categories, transitioned

salaried employees to hourly pay, out-

sourced information tech jobs and

relied on temporary contract workers

for customer service.

All those efforts help keep a lid

on costs, but they also reveal an ugly

truth. When you cut costs to the bone,

something has to give. Recent issues

surrounding transitioning clients from

fund to brokerage accounts and miscues

on handling fund distributions are just

the latest in a long list of service

Which Fund

Would You Select?

12/93

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12/01

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12/15

Wellington vs. Balanced Index

Rising line = Wellington outperforms

0.80

0.90

1.00

1.10

1.20

1.30

1.40

Bogle’s Worry (Ours, Too)

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