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The Independent Adviser for Vanguard Investors
•
August 2016
•
15
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performance more than makes up for
its underperformance, hence my Buy
rating here.
International Value
Hold.
I’ve referred to
International
Value
as something of a multimanaged
mess in the past, with four separate
teams (AllianceBernstein, Edinburgh
Partners, Hansberger Global Investors
and Lazard Asset Management) all han-
dling pieces of the pie. But a couple
of those managers have been fired,
and the new makeup hands one-quarter
of fund assets to ARGA Investment
Management (hired in 2012), a third
to Lazard (on board since 2006), and
almost 40% to Edinburgh Partners
(who’ve been here since 2008).
Like International Growth, while the
fund’s month-to-month outperformance
or underperformance relative to Total
International Stock Index is all over the
map, International Value has outpaced
the index over the long run, as you can
see in the chart to the right.
It appeared that Vanguard had final-
ly gotten the manager mix right, but
over the past few years, International
Value has slipped relative to Total
International Stock and International
Growth. The current team may yield
a payoff down the road, but I’d rath-
er stick with the leaner International
Growth.
Pacific Index
Hold.
Like European Index, Pacific
Index recently picked up a new bench-
mark, the FTSE Developed Asia Pacific
All Cap Index, bulking out the portfolio
with many small-cap stocks that it’s
never held before. Japan remains a
huge component of this fund’s bogey,
with close to 60% of its holdings there.
Australia is the next biggest source of
stocks, and then Korea, Hong Kong,
Singapore and a smattering of Kiwi
stocks make up the remainder.
As I noted earlier, I’ve never been a
big fan of Vanguard’s regional foreign
funds, because active managers have
shown they can outrun the indexes
pretty darned consistently. What do
buyers of foreign index funds like
Pacific Index know about Japan and
the Pacific Rim that the managers
don’t? I’d rather let the managers
decide how much to invest and in
which countries.
Total International Stock Index
Hold.
Anyone who chooses an index
fund over a managed fund in foreign
markets is simply not using their head.
Either that, or they just haven’t looked
at the numbers, which show that most
of Vanguard’s actively managed funds
have outperformed this index fund over
time.
Formerly an EAFE plus emerging
markets index fund, in the fall of 2010,
Vanguard switched the fund’s bogey
to the MSCI All Country World ex-
USA Investable Market Index. The big
change was that the fund suddenly had
portfolio exposure to Canada—making
it nearly indistinguishable from World
ex-U.S. Index. The move to the FTSE
Global All Cap ex-U.S. Index in 2013
was, by comparison, a non-event.
If you are looking to separate out
your U.S. and foreign index holdings,
this is my preferred foreign-only index
fund, as it now includes emerging mar-
kets and Canada, is cheaper than World
ex-U.S. Index (0.19% vs. 0.26%) and
holds more stocks than World ex-U.S.
Index (which doesn’t dip down into
the small-cap space). That said, I’m a
bigger fan of the managed options, par-
ticularly International Growth.
Total World Stock Index
Hold.
For a while this fund was giv-
ing Global Equity a run for its share-
holders’ money, as noted earlier. Today,
I’d opt for the managed fund if I wanted
a global stock portfolio.
This fund and its ETF shares (VT)
provide Vanguard with its only global
equities index option, which fills out
the company’s product line. If you
are an efficient-market adherent, this
would be the index option for you,
except for one problem: You could
replicate this fund at a lower cost by
buying Total Stock Market Index and
Total International Stock Index. Some
might prefer to have a single holding
for simplicity’s sake, but I’d rather
save a few extra pennies than a few
extra clicks.
Historically, risk was much greater
here than at Global Equity. During
the 2000–2002 bear market, Global
Equity’s maximum loss reached 23.3%.
The FTSE All-World index dropped
almost twice as much—a stunning
44.7% decline. However, during the
2008–2009 tumult, the tables were
turned—another reason to always keep
one skeptical eye open.
World ex-U.S. Index
Sell.
Looking for a way to put up a
competitive foreign equity exchange-
traded fund (ETF), Vanguard hit on the
idea of starting this fund to track the
FTSE All-World ex-U.S. index in 2007.
At the time of its launch, an allocation
to Canada distinguished this fund from
Total International Stock Index. Now,
however, the two funds have very simi-
lar country and region allocations, not
to mention top 10 holdings.
With “only” 2,400 or so holdings,
this fund has a more compact portfolio
compared to Total International Stock
Index’s 5,700-plus stocks. However,
the two funds have performed almost
identically since the latter’s 2010 over-
haul. As mentioned above, World ex-
U.S. Index is the more expensive option
of the two: Operating expenses run
0.26% versus 0.19%.
At this point, other than holding onto
this fund for tax reasons if you already
own it, there isn’t much of an argument
for buying it.
World ex-U.S. SmallCap Index
Hold.
This fund has at times
Active Management
Outperforms
6/96
6/98
6/00
6/02
6/04
6/06
6/08
6/10
6/12
6/14
6/16
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
International Growth vs. Total Int’l
International Value vs. Total Int’l
Rising line = Active fund outperforms
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