(PUB) Investing 2015

VANGUARD LAUNCHED its newest actively managed bond fund, Ultra- Short-Term Bond , on February 10, and after a short subscription peri- od, started investing client money on February 23. We’ve gotten a bunch of questions asking where the fund fits into a financial plan, and, more to the point, whether it is a money market alternative or not. Some confusion is understandable, as even Vanguard has gone back and forth on that. Vanguard’s initial informational article announcing the planned launch led off saying that investors who’d like to “earn a better return than the near- zero yield of a money market fund without losing the ability to access [their] money” as with a certificate of deposit, should consider Ultra-Short- Term Bond. Sounds like a case for a money fund substitute. Vanguard has since backed away from that, saying that since its price can and will fluctuate, the fund is not a money fund alternative; rather, inves- tors who are looking to “diversify the duration within the bond portion of CASH PLUS Ultra-Short Is Live

managers Gregory Nassour and David Van Ommeren will invest beyond the Treasury market, particularly among corporate bonds. Ultra-Short-Term Bond’s Investor shares (VUBFX) charge 0.20% in expenses and require a minimum ini- tial investment of $3,000, while the Admiral shares (VUSFX) charge 0.12% and require a minimum of $50,000. Ultra-Short-Term Bond is not a money market fund, as Vanguard even- tually made clear. But risk should be low, and investors who can handle small changes in NAV may indeed find this fund a good alternative to a money market fund, providing more yield and greater returns over time. However, like money funds, which I see more as money management tools than long- term investments, Ultra-Short-Term Bond shouldn’t play a main role in your long-term, diversified portfolio. It could well serve as almost-dry powder, but for your longer-term money, Short- Term Investment-Grade will serve the role of a portfolio shock absorber with greater returns over time. n

[their] portfolio” may want to look at the fund. Got that? Let’s be honest, investors aren’t thinking about diversifying duration— they are looking at this fund as a money market sub, as they do with Short-Term Tax-Exempt . Unequivocally, if you need a dollar-in, dollar-out guarantee and can’t make up any shortfall in your balance, then a money market fund is the way to go. But if you don’t need the money today or tomorrow, or can toler- ate small changes in price, then Ultra- Short-Term Bond could provide a little more income for your rainy-day funds. There isn’t yield or portfolio data available yet, but according to its pro- spectus, Ultra-Short-Term Bond will look to maintain a weighted maturity of 0 to 2 years (it was 1 year at month- end). The portfolio will hold at least 65% of assets in bonds rated A or better. The new fund is benchmarked against the Barclays US Treasury Bellwether 1-Year Index, which includes the most recently issued U.S. Treasury bill with a 1-year maturity. Though safety is going to be the name of the game, I expect

INTERVIEW > CHARLES PLOWDEN Finding Growth Here, and Overseas

to grow at double-digit rates over the long term. The long-term global average is 7% or 8% nominal earnings growth. And so we are looking for, let’s call it the top quartile of that, so 10% plus. We see different growth styles. A “growth stalwart” is very steady, predictable growth, but pretty much close to 10%. So that’s a Pepsi or Coca-Cola, tobacco companies and Colgate-Palmolive. There’s the high degree of certainty year to year about their performance that risk-averse investors like. Typically they are cash generative, and they do pay dividends, though they don’t have to. That sort of growth can be above average, but tends to fall in and out of fashion in terms of stock markets. At the moment, we see that sort of reliable stock as pretty pricey. The next category are “classic growth” stocks—the rapid growth stocks whose top lines are growing rapidly—often where demand is very strong. The big U.S. examples would be Facebook, Amazon, Google. These are companies that are capable of 15% to 25% per annum sus- tained growth rates. Again, with those companies, they go in and out of fashion, and they typically trade for high multiples.

AT JUST 54, Charles Plowden, chief of investments and one of two senior partners at Baillie Gifford, is barely half as old as his firm, which got its start in Edinburgh in 1908 and was first hired by Vanguard in 2003 to run a portion of International Growth . In 2008, the firm also took over portions of Global Equity and Growth Equity (which was merged into U.S. Growth , of which

they still run a portion). Plowden and two of his partners run one-third of Global Equity’s assets to mimic Baillie Gifford’s Global Alpha strategy, which has consistently outperformed Global Equity as a whole. Jeff and I discussed all of this and more with Charles last month. Charles, can you explain Baillie Gifford’s perspective on growth investing? When we think of growth, we really are talking about above-average growth. We are only interested in companies if they have the potential

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