(PUB) Investing 2016

622 / 708

12 • Fund Family Shareholder Association
MULTIMANAGERS
Vanguard Makes the Case (Poorly)
ARE MORE HEADS really better than one when it comes to portfolio management?
Well, Vanguard certainly thinks so, and in a recent web posting, they attempt to make the
case for multimanagement, though rather poorly in my estimation. But you have to parse the
language to see what’s being said.
The opening gambit is fairly strong: “(P)utting more heads together has its own advantage
when it comes to beating the market long-term.”
On its face, I totally agree with that. Diversification of thinking and strategies is a good
thing. I’ve lived and invested by that belief for decades. If you look at the Model Portfolios on
page 2, you’ll see quite a few heads combined in single portfolios, which over the long-term
have well exceeded the returns of the stock and bond markets.
However, Vanguard’s not talking about a manager-diversified portfolio. No sir. They’re
making the case for manager-diversified funds, those multimanager amalgams like
Explorer, Morgan Growth or even Diversified Equity, which have done poorly, though
not in Vanguard’s eyes.
Making the argument that there’s simply no evidence that multimanaged funds suffer from
too many cooks in the kitchen because multimanaged funds don’t hold as many stocks as the
massive index portfolios they’re measured against, Vanguard cites International Growth’s
quarter-end portfolio of 169 stocks versus its benchmark’s 1,848 stocks as proof. Of course,
Daniel Wallick, the missive’s author, doesn’t mention that Explorer’s portfolio of 718 stocks
is more than the 700 or so stocks in SmallCap Growth Index (you can’t invest in the 1,480
stocks in Explorer’s Russell 2500 Growth Index benchmark at Vanguard) or that, at 949 stocks,
Growth & Income has almost double the number of holdings in its S&P 500 index benchmark.
But so what? It’s not the number of stocks or the “ingredients” in the portfolios, but the cooks
adding those ingredients. And too many cooks do spoil the meal.
However, here’s the evidence that Vanguard says proves their multimanagement
approach works: “All 12 of our equity funds that have been multimanaged over the 10 years
ended March 31, 2016, have outpaced the average annual return of their peer groups.”
Well, that’s no surprise. As I’ve written before, Vanguard’s expense ratios are so much
lower (0.87%, or 87 basis points, on average across all active funds) than their peers that
it’s almost a given that even index-like performance will outperform the bulk of a mutual
fund peer group.
But contrast that 100% peer-beating performance with Vanguard’s admission that only 58%,
or seven of the 12 funds, outperformed their benchmarks, and you’ll see that where the rubber
meets the road—beating an index—the multimanager argument falls flat.
The multimanager format has a shot at working when there are a limited number of
managers fishing in a really big pond. Take International Growth, a multimanaged fund that
has long been a part of my Model Portfolios, and outpaced Total International Stock over
the decade ending in March, 40.2% to 20.5%. As Wallick correctly points out, International
Growth’s portfolio is fairly concentrated despite three different sub-advisers having a hand
in the portfolio.
But also keep in mind that those managers have the freedom to pick stocks from all foreign
markets—which make up nearly half of the global stock market. If there is room for more than
one manager picking U.S. stocks in my portfolio, there can be room for more than one manager
picking foreign stocks, too. Where the multimanager fund runs into real trouble is when you
cram seven firms into the kitchen and confine them to picking among, say, small-cap growth
stocks—think Explorer.
For my money and yours, I’d rather stick with single-manager funds like Dividend Growth
and the PRIMECAP funds, and will venture into funds like International Growth when it appears
the multiple managers aren’t loading up the portfolio with too many stocks. But let’s not make
the mistake of thinking Explorer, Morgan Growth or even the once-great Windsor II is ever
going to break out and win “Top Chef.” It just ain’t gonna happen.
rate is greater than its average over the
past decade and has been for a year.
Yes, consumer debt is at some of its
highest levels as a percentage of GDP
that we’ve seen in recent years, nearing
levels found just before the onset of
the financial crisis. But remember that
financing costs are low—really low—
and the quality of today’s debt is high.
While the absolute amount of debt may
be approaching 2008 levels, the slice of
disposable personal income necessary
to pay that debt is at near-record lows.
The country is awash in wallets and
purses bursting at the seams, waiting
to be unleashed upon retail and e-tail.
A statistic I’ve talked about before
is money at zero maturity, or MZM,
which is a measure of money in very
short-term accounts like money mar-
kets, savings accounts and the like. At
about $14 trillion currently, MZM is
77% the size of our $18.2 trillion econ-
omy—the highest relative to our overall
economy ever, and much higher than
the average 48% over the past 60 years.
It isn’t only consumers who need
bucking up. Investors lack confidence,
too. Less than 18% of respondents to
a recent American Association of
Individual Investors survey were bullish
on stocks for the coming six months.
That’s the lowest bullish response in
over a decade; even lower than during
the depth of the credit crisis. Plus, nearly
53% of the survey respondents were
“neutral”—a 25-year record high.
Given the slow-growth economy,
questions about the Fed and a divi-
sive presidential election, I can’t fault
them for saying, “I don’t know.” But
when bulls are massively outnumbered,
investors have often been rewarded for
taking a contrarian view. As Warren
Buffet quipped, “Be fearful when oth-
ers are greedy and greedy when others
are fearful.”
All that said, the bulls outvoted the
bears during May, with funds like In-
formation Technology ETF, Capital
Opportunity and S&P MidCap 400
Growth ETF up 5.3%, 3.8% and 3.3%,
respectively. Clearly, the 10.5% decline
for Precious Metals & Mining was a
REVERSALS FROM PAGE 1 >