(PUB) Investing 2015

low fees with volume. But that hasn’t happened at these two funds. Explorer Value’s three management firms split just $903,000 in fees in the most recent fiscal year. Emerging Markets Select Stocks’ four management groups took home a total $1.55 million—chicken- feed for a money manager. Consider that over at PRIMECAP Core , the last fund launched with a non- Vanguard manager prior to Explorer Value’s debut, the team took home $19.8 million in its most recent fis- cal year despite having closed to new investors in August 2009. Of course, performance might have something to do with that. Speaking of which, the PRIMECAP team took home the Manager of the Year award from fund rater Morningstar in January. Vanguard crowed about it online, but in a blog post, Vanguard senior analyst Chris Phillips took great pains to note that relying on fund rat- ings like Morningstar’s “stars” is, as he puts it, an investing “FAIL.” Youand I partneredwithPRIMECAP long before Morningstar figured out that the team was one of the best on the planet—and yes, a great example of active management putting indexes to shame—and we’ve benefited from their excellent stock picking over more than two decades. And that’s no “fail.” Finally, Vanguard’s investment team must be optimistic about interest rates. They’ve boosted Managed Payout ’s monthly distribution to $0.0589 from $0.0555 for 2015. Last year most of the fund’s 3.5% distributed income was real, rather than a return of capital. But that still doesn’t make the fund a win- ner. I’d avoid it. n

hike this summer, I wouldn’t take that as a signal that lots more will quickly follow. February is when I expect to see Vanguard launch Ultra-Short-Term Bond , which Jeff and I wrote to you about in the December issue. While the fund’s value will fluctuate, we still think it could still serve as a money- market-like substitute for cash that you don’t need next week or next month. In the meantime, Vanguard contin- ues to confound and confuse when it comes to active management. After almost five years for Explorer Value and four for Emerging Markets Select Stock , the two funds have grown to just $309 million and $278 million in assets, respectively—a pret- ty paltry showing, even for a couple of actively managed funds. Vanguard says they are now going to be avail- able to financial advisers who want to put them into clients’ portfolios. But why were the funds limited in the first place? According to Vanguard, “The funds had previously been limited to retail investors and certain institu- tional investors to mitigate capacity concerns.” What capacity concerns? One fund has three separate portfolio management teams, and the other has four. Did anyone really think these funds were going to collect billions in new money, or did hope simply spring eternal? Portfolio managers often work with Vanguard, despite being paid tiny fees (on a percentage basis), because Vanguard’s size and presence generally means they will see tons of new money flow into just about anything Vanguard puts into the marketplace. Portfolio managers expect to make up for these

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about the time many investors have begun to write off the benefits of diver- sification that I’ve been preaching for years and wrote to you about in last month’s newsletter. That being said, the story from Europe continues to confound, as the European Central Bank launched a 60 billion euro per month quantitative easing program, while Greece took a step in the other direction, voting in a leftist government that throws into question the durability of the EU pact. European Index gained 0.4% during January’s ups and downs, as Germany’s market hit several record highs before ending the month up 9.1%. The picture in the U.S. isn’t entirely rosy, of course. Durable goods orders were weak, and some companies are already feeling the negative impact of a strong dollar on exports and earnings. The initial read on fourth-quarter GDP indicates our economy grew at a 2.6% pace in the final three months of 2014, and 2.4% over the course of the entire year. That’s not China-like growth, but it is an improvement over the pace of the past few years. The Fed remains “patient,” and my initial estimate that they’d wait until at least midyear to hike interest rates is probably even a bit aggressive now, given how low inflation is and how strong the dollar is. I think there has to be at least some concern on the part of the Fed governors that hiking the short rate could further strengthen the dollar and harm our export growth as well as profits earned overseas for dollar-based companies. So, even if the Fed does give the markets one rate

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The Independent Adviser for Vanguard Investors • February 2015 • 3

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