(PUB) Investing 2016

656 / 708

14 • Fund Family Shareholder Association
through the end of March 2016
(the most recent data I found for the
sub-advisers), Global Equity returned
135.3%. Marathon’s separate account
was up 205.6%—meaning the fund still
hasn’t performed as well in its new form
as it would have under sole manage-
ment by Marathon. Baillie Gifford’s
separate account gained a respectable
173.1%. And as I said, Acadian’s indi-
vidual record brings up the rear with a
114.9% gain.
A global fund can make a great core
holding for those with smaller portfo-
lios who are looking for exposure to
foreign stocks. But given that just over
half the portfolio is made up of over-
seas stocks, you’ll have to temper it
with at least one or two domestic funds
to avoid excessive foreign exposure.
One thing is clear, though: Active man-
agement has won the day here.
Global Minimum Volatility
Buy. Out of the gate, Global
Minimum Volatility has put up terrific
numbers when compared to its glob-
al counterparts. Granted, the fund has
only been open since mid-December
2013, so it’s only just approaching its
third anniversary, but Vanguard’s ver-
sion of risk aversion has worked over
the past few years. Since inception, the
fund’s 34.9% gain is tops among all of
Vanguard’s diversified stock funds—
foreign or domestic. It’s better than
Total Stock Market’s 26.7% gain, as
well as Total International Stock Index’s
0.2% decline. Score one for Vanguard’s
active management team.
If I had to summarize what’s made
this fund work so far, it’s that it has
done better versus its peers in down
markets than in up markets. Over the
first 31 full months it has been in busi-
ness, there have been 14 months when
Total World Stock Index declined.
During those months, Global Minimum
Volatility outperformed the index fund
by an average 1.9%. In the other 17
months, when Total World Stock Index
was up, the index fund’s outperfor-
mance averaged just 0.5%. In fact,
Global Minimum Volatility outper-
formed the index fund in up months
about half the time. That’s impressive.
What’s going on here? Well, the
fund’s objective is to have broad, global
stock exposure exhibiting lower volatil-
ity than the overall market while build-
ing a portfolio that doesn’t differ in its
industry exposures from the bench-
mark. In addition, the fund’s manag-
ers attempt to minimize or eliminate
currency risk. This means the fund has
had twin tailwinds at its back: Low
volatility stocks have been in vogue,
and the dollar’s strong climb of nearly
20% against a basket of currencies
means currency hedging has contrib-
uted mightily to performance.
With less than three years under
its belt, Global Minimum Volatility
already has over $500 million in
assets. The fund has merit, and even
more so as long as the dollar remains
strong. But I wouldn’t expect that
top-of-the-tables performance to con-
tinue uninterrupted. Once the currency
tailwind becomes a headwind, outper-
formance may fade. Additionally, at
some point, lower volatility stocks will
fall out of favor with investors. This
fund has definitely earned its Buy rat-
ing, but you may need to temper your
expectations.
International Explorer
Hold. As I’ve said many times,
this fund faces stiff competition from
its passive cousin, World ex-U.S.
SmallCap Index.
International Explorer, like the
index fund, is focused on small-cap for-
eign stocks. In my mind, that long-term
objective should favor active manage-
ment, since separating the wheat from
the chaff is critically important when
selecting among smaller foreign firms
operating in multiple countries using
multiple currencies and reporting under
multiple accounting rules and regula-
tions. But how it’s being executed may
ultimately be International Explorer’s
downfall.
Schroder Investment Management’s
team, led by Matthew Dobbs in London,
can take credit for the fund’s early
success. (This is the same Schroders
that oversees a portion of International
Growth.) However, after a fantastic run
as a tiny fund, Schroders’ performance
turned lackluster. The fund has per-
formed relatively better since the addi-
tion of Wellington Management’s Simon
Thomas, but overall, since Vanguard
“adopted” it 14 years ago, it hasn’t been
able to outpace its benchmark.
International Explorer, whose 2015
performance earned it the Hot Hands
designation for 2016, has had its good
periods and its bad ones. I am not con-
vinced it’s best for our portfolios. If you
own it, okay. But I am not pounding the
table to buy it.
International Growth
Buy. This good fund just got a
whole lot better. As Dan notes on page
4, Vanguard trimmed International
Growth’s manager ranks from three
to two by firing M&G Investment
Management last month. M&G only
ran 12% or so of the fund, so this isn’t
a drastic overhaul, but it helps. With
the change, Baillie Gifford will manage
60% of the assets, and Schroders will
run 40%.
International Growth was one of
the multimanaged funds that actually
worked, with a reasonably compact
portfolio and index-beating returns
over long periods of time. That said,
I think this is a change for the better.
Keep in mind, though, this doesn’t
mean the fund will outpace Total
International Stock Index month after
month. In fact, over the three and a half
years between when Baillie Gifford’s
weight in the fund stabilized at around
50% and the end of June, International
Growth has only outpaced the index
fund in 20 of 42 months. But its out-
>
Global Equity vs.
Total World Stock Index
6/96 6/98 6/00 6/02 6/04 6/06 6/08 6/106/12 6/14 6/16
Rising line = Global Equity outperforms
▼
AllianceBernstein
fired
Baillie Gifford
hired (fourth
manager)
Acadian Asset
Management joins
Marathon on fund ▼
▼
Alliance
Bernstein
hired (third
manager)
▼
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50