(PUB) Investing 2016

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6 • Fund Family Shareholder Association
BOND MARKET PUNDITS are raising
the “R” word again. That’s “R” for
“recession.”
Their current bugbear: The shape of
the Treasury yield curve and, in particu-
lar, the difference between 10-year and
2-year Treasury rates.
I know discussing the bond market
and the yield curve (a) causes eyes to
glaze over and (b) often feels a little in
the weeds, but stick with me here. The
current worry about the yield curve is a
great example of pundits framing the data
to tell the story they want (and in the pro-
cess scaring investors and driving clicks
on their websites) rather than looking at
the data and then coming to a conclusion.
In fact, rather than a bearish tale, the
actual, objective story here is a bullish
one.
Let’s start at the beginning with the
yield curve. The first graph on page 7
shows today’s yield curve, which maps
the current yields of Treasury bills,
bonds and notes with maturities rang-
ing from three months out to 30 years.
Generally, the yield curve slopes up
to the right as investors demand more
income (or yield) as they lend money
for longer. But the shape of the yield
curve changes, because bond yields
don’t all rise and fall by the exact
same amount at the exact same time.
When the difference (or spread) in
yields between long and short maturity
bonds rises, we say that the yield curve
is steepening. Conversely, the yield
curve is flattening when that spread
shrinks.
Why do we care about the yield
curve? Well, some investors, econo-
mists and market strategists use the
yield curve as a sign of the health of
our economy.
It helps to think about the basic
means by which a bank makes money.
In simple terms, a bank “borrows”
money in the form of deposits and
pays savers interest at short-term rates
(which, as we know all too well, have
been next to nothing for years). The
MYTHS
Recessions and Bonds—Bears Have It Wrong
HERE THEY GO AGAIN. In a July
1 posting to its website, Vanguard
brags about the “since inception” mar-
ket-beating performance of MidCap
Growth, a multimanaged fund run
by Chartwell Investment Partners and
WilliamBlair Investment Management.
As Vanguard writes, “the fund has
beaten its benchmark by more than 2
percentage points since its December
31, 1997, inception…”
There’s just one problem: The mul-
timanagement duo, which has been
running the fund since June 2006, has
underperformed its benchmark.
How is this possible? MidCap
Growth is aVanguard adoptee. The fund,
originally named Provident MidCap,
was started by Provident Investment
Counsel in 1997 and was adopted by
Vanguard in July 2002. At the time, the
managers had crushed the returns of
the Russell MidCap Growth Index—
MidCap Growth’s benchmark—rising
47.4% to the index’s 8.9% loss. But
Provident was getting no traction in
the marketplace, and the fund’s assets
stood at a paltry $31 million at the time
the adoption was proposed. (On a side
note, Vanguard also adopted the fund
that is now International Explorer ,
which was even smaller, at the same
time.)
In the relative performance chart
to the right, you can see the stunning
outperformance of the fund in its first
two years relative to the Russell bench-
mark. You can also see that relative
performance began to go south just
after Vanguard adopted the fund, and,
as of the end of June 2016, the fund has
underperformed dramatically.
Vanguard continues to try and make
it appear as though their multimanage-
ment strategy on individual mutual
funds is a winner. At least when it
comes to MidCap Growth (and sev-
eral other funds, like Explorer and
Morgan Growth), it’s been anything
but. n
PERFORMANCE
Distorting MidCap Growth’s Gains
MidCap Growth vs. Russell
MidCap Growth Index
6/98 6/00 6/02 6/04 6/06 6/08 6/10 6/12 6/14 6/16
Rising line = Fund outperforms
▼
Adds
Chartwell as
co-manager
Fires original
manager,
Provident, and
hires William
Blair to split fund
with Chartwell
Vanguard
“adopts”
fund and
renames
it MidCap
Growth
▼
▼
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
As It Grows, MidCap Growth Slows
Annualized Performance since: MidCap Growth
Russell MidCap
Growth Index
Fund Inception (Dec. 1997) 9.5% 7.4%
Vanguard Adoption (June 2002) 8.8% 9.8%
Current Dual Managers (June 2006) 7.8% 8.1%
Note: Returns through June 2016.