(PUB) Investing 2016

•

Fund Family Shareholder Association

www.adviseronline.com

Morgan Growth’s low expenses make

it an able competitor in the broad mutual

fund universe, as is the case with most

of Vanguard’s multimanager funds, but

that doesn’t mean the fund is deserving

of your money. Over the past nearly 30

years, Morgan Growthmay have matched

the Russell 3000 Growth index, but it has

lagged steadily over the past decade.

Even former Vanguard Chairman

Jack Bogle said years ago that Morgan

Growth is “an average fund. It’s not a

star.” If I’m not buying a star, why con-

tinue to pay active management fees if

you are just going to receive index-like

or worse performance?

PRIMECAP

Buy.

Let’s make it simple. A dollar

invested in

500 Index

at the end of 1984

when this fund was launched would be

worth $26.12 today. A dollar invested in

Morgan Growth and one in U.S. Growth

over that same period would be worth

$23.60 and $13.91, respectively, today. A

dollar in PRIMECAP? $54.06!

How do they do it? Independent

thinking and patience combined with a

distinct approach to picking stocks and

managing a fund is how.

The PRIMECAP Management team’s

approach can be simplistically called

growth-at-a-reasonable-price, or GARP.

The managers look for companies with

the potential for strong earnings growth,

but which are currently selling for less

than comparable growth companies are—

most likely because there’s some negative

factor influencing most investors’ percep-

tion of the company’s value. Because

they are buying stocks facing near-term

uncertainty, it often takes time for their

ideas to work out. But in contrast to many

other growth managers, the PRIMECAP

team is willing to wait, and on average

holds onto a stock for a decade.

Also in contrast to other growth

managers, there is no single star man-

ager here. The PRIMECAP team

eschews the limelight. Each of its five

managers is responsible for managing a

slice of the fund. If two managers own

the same stock, it will result in a larger

position in the portfolio, but each man-

ager is accountable for his own deci-

sions. The end result of this approach

is a high-conviction portfolio with 131

stocks and over 40% of the assets in its

10 largest holdings.

While the long-term track record is

impressive, keep in mind that the fund

does not beat the market month in and

month out. In fact, since the fund’s incep-

tion, it has only outperformed 500 Index

56% of the time. But it’s those periods of

outperformance that have created such a

stunning long-term track record.

PRIMECAP remains closed to new

investors, but its near-clone,

PRIME-

CAP Odyssey Growth

(POGRX), is

wide open. Because of its smaller size,

it’s nimbler, and it has substantially

outperformed its granddaddy since

its introduction in November 2004.

Through August 2016, the new fund is

up 225.7% versus 206.2% for gramps.

The

Odyssey

funds are available

through Vanguard’s brokerage ser-

vice, and as I have long recommended,

unless the taxes you’ll pay selling your

Vanguard holdings are a concern, you

have no excuse for sticking with the

original, which is still great, but not

great

. At a minimum, I’d take any dis-

tributions from PRIMECAP and invest

them in the

Odyssey

fund.

PRIMECAP Core

Buy.

The youngest PRIMECAP

Management-run fund at Vanguard has

been closed to new investors longer

than it was ever open to all comers. Too

bad. This slightly less growthy version

of PRIMECAP has a lot going for it.

In fact, it’s the only PRIMECAP-run

fund at Vanguard that’s outperformed

its

Odyssey

sibling, mainly because it

has a lower expense ratio and both

funds are nearly identical, having been

birthed at virtually the same time. The

expense difference is key. Since their

December 2004 inceptions through

August 2016, PRIMECAP Core outper-

formed

Odyssey Stock

(POSKX) by a

narrow margin, 189.6% versus 182.0%

With about 150 stocks, and one-third

of its assets among its 10 largest hold-

ings, this fund has all the hallmarks

of a typical PRIMECAP Management

offering. Though, as the name implies,

Growth Index Funds

Growth Index

S&P 500

Growth ETF

Russell 1000

Growth ETF

MegaCap

Growth Index

8/31/16

Number of Stocks

330

316

605

144

P/E

27.3

24.3

24.8

26.2

P/Book

4.8

4.9

5.7

5.0

Median Market Cap.

$70.3

$88.9

$70.3

$95.8

Expense Ratio

0.22% / 0.08%*

0.15%

0.12%

0.09%

Sector Allocations

Consumer Services

21.2%

17.3%

22.3%

22.8%

Consumer Goods

11.3%

9.8%

9.1%

11.5%

Oil & Gas

3.1%

1.6%

0.6%

3.0%

Financials

12.5%

8.2%

9.8%

11.2%

Health Care

14.8%

17.2%

16.7%

15.1%

Industrials

11.4%

9.1%

11.1%

9.0%

Technology

24.3%

33.2%

25.1%

25.6%

Basic Materials

1.0%

2.4%

4.1%

1.7%

Telecom

0.4%

0.9%

—

0.1%

Utilities

0.0%

0.3%

1.2%

0.0%

Top-10

27%

30%

26%

33%

Apple

Alphabet

Amazon.com

Microsoft

Amazon.com

Facebook

Amazon.com

Facebook

Coca-Cola

Facebook

Coca-Cola

Home Depot

Comcast Johnson & Johnson

Visa

Comcast

Philip Morris Int’l

General Electric

Walt Disney Philip Morris Int’l

Visa

Comcast

Visa

Walt Disney

Pepsi

Walt Disney

*Investor shares and ETF shares. Admiral shares are also 0.08%. Note, Vanguard’s Russell and CRSP indexes use different definitions for the

“sectors” their indexes are allocated to, so comparisons are approximate.