(PUB) Investing 2016

693 / 708

The Independent Adviser for Vanguard Investors • November 2016 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
Daniel P. Wiener - Senior Editor
Jeffrey D. DeMaso - Editor/Research Director
Seth H. Kennedy - Assistant Editor
Amy Long - Vice President and Publisher
David Clarfield - Managing Editor
Rachel Johnsen - Editorial Assistant
Louisa Dorado - Marketing Director
Mary Southard - Marketing Director
John Hall Design Group - Design and Production
Fund Family Shareholder Association
Member, Newsletter Publishers Association
Daniel P. Wiener - Chairman
James H. Lowell - President
The Independent Adviser for Vanguard Investors (ISSN 1093-4200) is published monthly for members of the Fund Family Shareholder Association
by InvestorPlace Media, LLC, 9201 Corporate Blvd., Suite 200 Rockville MD 20850. A one-year membership is $229 (foreign, add $18).
POSTMASTER: Send address changes to The Independent Adviser for Vanguard Investors/Fund Family Shareholder Association, c/o InvestorPlace
Media, LLC, 9201 Corporate Blvd., Suite 200 Rockville MD 20850.
The FFSA is an independent organization dedicated to providing investors with intelligent and objective advice about the Vanguard family of mutual
funds and services. If you have questions regarding your membership, call 800/211-7641 ). While the information provided
is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can the publication be considered liable for
the future investment performance of any securities or strategies discussed. The newsletter, hotline and associated publications provide information
of general interest and are not intended to provide individualized investment advice for any subscriber or specific portfolio. Subscribers are urged to
review the full disclaimer and securities holdings disclosure policy associated with this publication at
html or call 800-219-8592 to receive a copy via mail. Vanguard and The Vanguard Group are service marks of The Vanguard Group, Inc. FFSA and
InvestorPlace Media, LLC are not affiliated in any way with The Vanguard Group and receive no compensation from The Vanguard Group, Inc.
Copyright 2016 by Fund Family Shareholder Association. Reproduction in whole or in part is prohibited except by written permission of FFSA.
MATH FROM PAGE 1 >
three-year returns fall from double-dig-
it territory include Strategic Equity ,
which slipped from 10.2% to 7.5%
and Dividend Growth , which dipped
from 10.1% to 7.6%. What happened?
Blame it on the math, as some strong
months in 2013 rolled off the three-year
calculation and recent weaker months
rolled on. I don’t want to make too big
a deal about this because, frankly, you
know that my focus has always been on
“rolling returns,” using multiple return
periods to get a true sense of long-
term performance, rather than “point-in-
time” returns.
That said, the three-year number car-
ries weight with rating agencies and the
press, which often uses it as a criteria
for ranking funds, setting the three-
year return up as a de-facto benchmark.
I believe some investors may see the
return to single digits as a canary in the
coal mine, signaling a negative turn in
the markets. I don’t see it that way—the
economy remains strong, as do con-
sumer balance sheets. The first estimate
for third quarter GDP growth came in
at 2.9%, the fastest pace in two years
and a significant improvement over the
1.1% pace the economy grew at during
the first half of the year.
Even if the Fed hikes the fed funds
rate in December, which I think they’ll
do, interest rates will remain extremely
“accommodative,” which means low to
any consumer or corporation looking
to borrow money. “Easy” money is a
lubricant for economic growth.
And don’t look now, but, even after
taking inflation into account, the medi-
an income of the full-time American
worker hit an all-time high in the third
quarter. Yes, low inflation has helped,
but workers, and not just those at the
top, have regained some buying and
bargaining power.
Earnings reporting season is a little
more than half over, and nearly three-
quarters of companies in the S&P 500
earned more than expected in July,
August and September. At this pace,
we’ll see the first year-over-year increase
in earnings since the first quarter of 2015.
Add that all together, and in spite of
the election and pending Fed action,
Jeff and I may be on the cusp of upgrad-
ing our outlook from “slow growth, not
no growth” to “moderate growth, not
slow growth.”
Malvern Odds and Ends
Jeff and I got the answer on why
those September distributions on Short-
Term Investment-Grade and some of
the other Vanguard funds, particularly
those with short maturities, dropped so
precipitously. This is a bit complicated,
but in essence, the formula that is used to
calculate what a bond fund pays out each
month is not simply based on the inter-
est it takes in each month. The month’s
earned interest is annualized, divided
by 365 and then accrued daily into the
fund for eventual payout at month’s end.
Because the TIPS in the funds’ portfolio
had a severe cut to their distributions
and because those distributions made up
a disproportionate part of September’s
income, annualizing the much smaller
income stream yielded a much small-
er month-end distribution. Got that? It
makes sense, but it took several backs-
and-forths with Vanguard to get a rea-
sonable answer. In October, Short-Term
Investment-Grade’s distribution bounced
back closer to where it was before.
Speaking of distributions, year-
end is approaching rapidly, and while
Vanguard won’t be providing estimates
of potential capital gains distributions
until November 10, we can get a sense
of which funds are poised to make
payouts by looking at realized capi-
tal gains through September. Among
stock funds, those with realized gains
of 3% or more of quarter-end NAV
are Alternative Strategies, Capital
Opportunity, Diversified Equity,
Explorer , Growth & Income, Health
Care , Morgan Growth, PRIMECAP ,
PRIMECAP Core, Selected Value
and Windsor II. Income funds with
realized gains of 1% or more include
Intermediate-Term Treasury , Long-
Term Investment-Grade and Long-
Term Treasury . And while most ETFs
will probably avoid paying out capital
gains, Extended-Duration Treasury
ETF does have realized gains of about
1.9% of quarter-end NAV.
Remember that these figures can and
do change between initial estimates and
final payouts. But this should give you
a good sense of where the biggest capi-
tal gains could be coming from.
For those following the October
Hot Hands strategy, the October Hot
Hands fund, which you’d buy now
and hold until the end of October
2017, is High-Dividend Yield Index.
Last year’s October Hot Hands fund,
U.S. Growth , underperformed, gain-
ing just 0.1% over the past 12 months
versus 4.4% and 4.1% returns for 500
Index and Total Stock Market Index
respectively. Hopefully you followed
my recommendation to stick with
a PRIMECAP-run fund instead of
U.S. Growth as PRIMECAP gained
4.7%, and PRIMECAP Odyssey >