(PUB) Investing 2015

should invest before or during retire- ment. Finally, Vanguard filed registration papers at month-end for an Alternative Strategies fund, which it plans to open in late May. Alternative Strategies has the option of using long-short strategies, event- driven investing, strategies to attempt to capture mispricing in the bond markets, and commodity contracts and curren- cies. Fund manager Michael Roach, a member of Vanguard’s quant team, is expected to use leverage to amplify the investments in the fund. But before you get all hot about Vanguard’s entry into an area it has often critiqued as inappropriate for most individual investors, recognize that (a) the fund will have a $250,000 minimum, which means it will be out of range for most individual investors, and (b) it’s being launched primarily for use by Managed Payout , which used to invest in commodities through a spe- cial internal fund but recently has used the PowerShares DB Commodity Index Tracking Fund (ticker: DBC), and long- short strategies through Market Neutral . I would expect that sometime after its launch, Vanguard will remove the Market Neutral allocation from Managed Payout. As of Jan. 31, Managed Payout’s 9.9% allocation to the long-short fund represents $155 million, or a little less than half the $344 million in assets invested in Market Neutral. It wouldn’t surprise me in the least to see Vanguard shut- ter that fund down the road. Expenses in the Alternative Strategies fund are expected to run 1.10%, which is lower than the current 1.60% expense ratio on Market Neutral. n

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Moving Targets

gained 5.5% on the backs of record highs in the U.K. and Germany and big gains in Japan and Brazil. Bond investors, on the other hand, gave back with the right hand what they’d received with the left. Long- Term Treasury ’s 5.7% loss was its fifth-worst monthly drop since its May 1986 inception, which seems appropri- ate, given that in January, the fund’s 9.0% gain was its third-best ever. The fund is up 2.8% for the year compared to Total Bond Market ’s 1.2% rise. Investors should be prepared for more extreme swings from Long- Term Treasury. Why? The fund’s average maturity of 24.7 years is at the long end of its historical range, meaning the fund is even more sensi- tive to changes in interest rates than usual. Additionally, with an SEC yield of 2.28% (near a record low for the fund), there is not much income to dampen the changes in price to the downside. Meanwhile, Vanguard decided to up its game in the overseas mar- kets by ratcheting up allocations to Total International Stock and Total International Bond in its various funds-of-funds. At the same time, it announced institutional shares of its Target Retirement funds, which should launch in Q2 with expense ratios of just 0.10%, versus 0.16% to 0.18% for the current Target funds. The new share class doesn’t fully address the ques- tion I posed years ago—namely, why Vanguard didn’t use its cheapest share classes in all of its funds-of-funds, which are staples in the 401(k) indus- try—but it’s a start. The benefits of

0% 10% 20% 30% 40% 50% 60% 70% 80%

US Stock Foreign Stock

US Bond Foreign Bond

2003 2006* 2010 2013 2015

* Emerging Markets added to foreign allocation

these lower expenses will only accrue to the largest retirement plans—those with $100 million in assets or more. While Vanguard focused on these lower-expense funds, the much big- ger story was the fact that Vanguard’s investment management committee has decided to boost exposure to foreign stocks to 40% of equity assets. While I believe an allocation to foreign equi- ties is, indeed, a good idea, a 40% slice is a big one, and well beyond what Vanguard has long discussed in its public pronouncements. That said, Vanguard could be slowly mov- ing towards a commitment to the near 50/50 allocation of Total World Stock Index , a move that would be in keeping with its “efficient market” mantra, but one that I think would be too heavily exposed to the issues of non-dollar cur- rency moves. The change also marks the fourth reallocation of assets since the Target funds opened in 2003, suggesting that, like its competitors, Vanguard has dis- covered glide paths seem simple on paper, but there is no single “right” answer to the question of how one

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The Independent Adviser for Vanguard Investors • March 2015 • 3

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