(PUB) Investing 2015

each fund to its benchmark is that just two of the eight equity funds which have been multi-managed for the 10 years through September 2014 actually outperformed their benchmarks. That’s 25%. And in the 10 years through December 2014, just one fund out of those eight was able to outperform. That’s 12.5%. The bottom line is that investors in most of Vanguard’s multi-managed funds would have been better off in an index fund or ETF, or finding an active manager captaining another mutual fund ship over the past 10 years. They also could have invested in the Growth Model Portfolio , which outperformed every one of these eight funds over both 10-year periods mentioned. By the way, the one fund that beat its benchmark over both 10-year periods cited above: International Growth , a fund that has been a component of the Model Portfolios for years. You can find good active manage- ment and you can build portfolios of active managers that will beat the

Matching Multiple Managers to Benchmarks Multi-Managed for 10 Years Through 9/30/14 Sep-14 Dec-14 Benchmark

Sep-14 Dec-14 9.0% 8.4% 10.1% 9.4%

Equity Income

8.8% 8.3% FTSE High Dividend Yield Index* 9.0% 8.2% Russell 2500 Growth Index

Explorer

International Growth International Value

7.9% 6.2% MSCI All Country World Index ex USA 7.3% 5.4% 7.1% 5.2% MSCI All Country World Index ex USA 7.3% 5.4%

Morgan Growth

8.5% 7.9% Russell 3000 Growth Index 8.1% 7.7% Russell 1000 Growth Index 7.6% 6.9% Russell 1000 Value Index 7.9% 7.2% Russell 1000 Value Index

9.0% 8.5% 8.9% 8.5% 7.8% 7.3% 7.8% 7.3%

U.S. Growth Windsor Windsor II

Multi-Managed for Less Than 10 Years Capital Value Emerging Mkts. Select Stock

8.9% 7.4% Russell 3000 Value Index

7.8% 7.3% 11.2% 9.0% 8.7% 6.0% 8.7% 7.9% 7.6% 6.4% 8.1% 7.7% 8.8% 6.9% 6.4% 6.6% 10.2% 9.4%

N.A.

N.A. FTSE Emerging Index

Energy

10.8% 8.1% MSCI ACWI Energy Index

Explorer Value Global Equity Growth & Income International Explorer

N.A.

N.A. Russell 2500 Value Index

7.7% 6.3% MSCI All Country World Index

7.4% 7.0% S&P 500 Index

8.9% 6.6% S&P EPAC SmallCap Index

Long-Term Investment-Grade 7.0% 7.2% Barclays US Long Credit A or Better Idx. 10.6% 9.7% Russell MidCap Growth Index 10.2% 9.3% Russell MidCap Value Index 10.2% 9.4% *As the FTSE Index is less than 10 years old, the performance here uses the Russell 1000 Value index through July 2007, which is how Vanguard measures the fund as well. All returns are annualized over the 10 years through the date listed. MidCap Growth Selected Value

indexes. You and I have even done it at Vanguard, as the performance of the Model Portfolios more than illustrates. But you won’t do it by larding your

portfolio up with a soup of multi-man- aged funds with dozens of chefs in the kitchen, no matter how Vanguard tries to cook the numbers. n

know that the weakest members could be expelled. The issues are politi- cal, not economic.

strongest-performing major markets last year. We were enthusiastic about everything that was happening, but we were too busy window shopping, and we didn’t go into the shop and come out with something in our bag. Investors, pundits and even Jack Bogle have been questioning whether U.S. investors need foreign stocks at all. Why own for- eign stocks at all? I haven’t been asked that till now. The big influence in recent years has been currency rather than corporate performance. We made similar nominal returns in some European stocks or Asian stocks, but the cur- rency has gone against them. Maybe the dollar is now getting to heights from which it could in five year’s time be weaker. Also, U.S. listed corporations are significantly more highly valued than their international peers and competitors. So you get less bang for your buck if invested in the U.S. You may say that you get better corporate governance and more trans- parency and higher quality of company—and I wouldn’t argue with any of those particularly—but there is a premium attached to U.S. corpora- tions. You can put all your money into one of the most expensive cur- rencies and stock markets, but it’s quite easy to envision circumstances where that could work against you. Just because it’s worked for you over the last four years, that might well change at some point. The other helicopter view is there are twice as many companies out- side America as there are inside. There is more choice. And that suggests you can add value through picking the very best international companies.

Does the strength of the dollar—and there seems to be a strong consensus it’s going to continue to strengthen—impact your thinking and management of the portfolio? It has a little. We’ve had a view over the last 18 months that the U.S. was likely to be the strongest of the developed market economies and the first place to see recovery. We have been increasing exposure to the U.S. market, to the dollar and particularly to the domestic U.S. economy. We haven’t gone as far as we could have gone or indeed should have gone. Certainly that was one of the handicaps to performance for us last year. I think I would agree with the consensus that the dollar looks well underpinned and the fundamentals remain firmly in its favor. That means one would tend to look for new ideas in domestic U.S. companies that are not exposed to import competition. And one would tend to steer away from exporters from the U.S. because they are going to have a ris- ing cost base in dollars and they are going to be competing with cheap yen or cheap Korean won or cheap euros. Last time we spoke, you were window shopping in the emerging markets. How is your shopping cart looking? We are still window shopping, and we’ve probably saved ourselves some money by not actually going into the shop. Over the last year, we’ve been net sellers of emerging markets companies. We haven’t really found much to buy in emerging markets. The one market where I wish we’d shown more urgency and done something more was in India. It was just about the

Well, thank you for your insights, Charles.

The Independent Adviser for Vanguard Investors • March 2015 • 7

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