655 / 708
The Independent Adviser for Vanguard Investors
•
August 2016
•
13
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
207.3%, while Total Stock Market
Index only gained 20.1%. Before you
get caught up in those returns, consider
that diversification can cut the other
way: From the end of 2007 through
June 2016, Emerging Markets Index
lost 7.3% as Total Stock Market Index
gained 84.7%.
I know that there will come a time
when U.S. stocks’ dominance over
foreign stocks will end—I just don’t
know when. For now, Dan and I are
comfortable allowing the managers at
International Growth decide when it
makes sense to allocate to this risky but
potentially rewarding part of the global
market.
Emerging Markets Select Stock
Hold.
Vanguard’s first move into
active management in the emerging
markets was a cautious one—doling
out portions of this fund’s portfolio to
four separate firms: Wellington, M&G
Investment Management, Oaktree Capi-
tal Management and Pzena Investment
Management. The fund celebrated its
fifth birthday at the end of June.
It wasn’t exactly an auspicious start.
Emerging Markets Select Stock is down
7.4% since inception, while Emerging
Markets Stock Index is off 12.1%. The
fund’s relative performance, as you can
see in the chart below, was strong in the
early innings, but it faded fast in 2014.
Yes, the active fund has clawed back
some relative performance over the past
18 months, but so far I’d describe the
performance as average, and I’m not
convinced we’ll see anything more than
that going forward.
Assigning four firms to this fund
reduces the impact of a single manager
misstep, but at the same time limits
the ability of any one manager to add
significant value. Further, it should
be noted that the sleeve managed by
Wellington is composed of stocks
selected by a team of global industry
analysts. So there are actually dozens
of cooks stirring the portfolio pot here.
I believe this fund is another clas-
sic case of Vanguard handicapping its
active managers so heavily it ensures a
boring race.
European Index
Hold.
As I mentioned earlier,
European Index recently picked up
a new bogey, the FTSE Developed
Europe All Cap index, which adds
small-cap stocks into the mix. Based
on historical data for the old and new
indexes, the addition of smaller stocks
has only added marginally to perfor-
mance over the dozen or so years for
which data is available. So, it’s not as if
a supercharged index fund has emerged
from this shift.
I’m sure investors are more con-
cerned about the impact of the Brexit
vote and negative interest rates than
Vanguard tweaking its indexes. To
buy European Index today, you’ve got
to believe two things: First, that the
aforementioned uncertainties are creat-
ing opportunity, and second, that an
indexed approach is the best way to
capture those opportunities.
I can get on board with the first
idea—though I don’t think you need to
rush into the space—but I stumble at
point number two. I’d prefer to invest
with a manager who can sort through
the winners and losers that will emerge
as the uncertainties in Europe evolve.
Dan and I have never been a big fan
of Vanguard’s regional foreign funds,
because, well, active managers have
shown they can outrun the indexes
pretty darned consistently.
As the chart above shows, over
the past dozen years or so, European
Index and Pacific Index’s relative per-
formance against Total International
Stock has been all over the map, and
ultimately, all three funds led you to
essentially the same place over the
entire period. Finding the right entry
and exit points would be incredibly
tough to do. What advantage do you
think the indexes have over the experts?
Global Equity
Hold.
Firing AllianceBernstein
may have been one of the best moves
Vanguard’s ever made. (After axing
former
Growth Equity
manager
Turner Investments, that is.) Not only
did AllianceBernstein do a terrible job
running domestic growth stocks, but
since being taken off the roster at this
world-stock fund and handing much
of its portfolio allocation to Baillie
Gifford, Global Equity has begun to
show some of its old luster.
Original manager Marathon Asset
Management generated strong returns
when Global Equity got its start. Today,
Marathon’s allocation in the portfolio
is down to a third of assets, and Baillie
Gifford and Acadian each run anoth-
er third. Since redistribution of assets
occurred around March 2013, Global
Equity has outperformed Total World
Stock Index, with about the same allo-
cation of U.S. and non-U.S. stocks, ris-
ing 28.3% compared to the index fund’s
24.9% gain.
I was able to find individual global
equity returns for each of the three sub-
advisers, and while these numbers may
not be exact replicas of the managers’
history on Global Equity, it does give
us a chance to look under the hood of
the fund. Acadian, which runs a com-
puter-driven strategy, is the weak hand.
Since Baillie Gifford came on board
EMSelect Stock vs. EM Index
6/11
12/11
6/12
12/12
6/13
12/13
6/14
12/14
6/15
12/15
6/16
Rising line = Emerging Markets Select Stock outperforms
0.94
0.96
0.98
1.00
1.02
1.04
1.06
1.08
1.10
1.12
Relative Performance
Changes Quickly
6/05
6/06
6/07
6/08
6/09
6/10
6/11
6/12
6/13
6/14
6/15
6/16
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
European Index vs. Total International Index
Pacific Index vs. Total International Index
>