(PUB) Investing 2015

next to no chance of distinguishing itself from the index, but my skeptic’s eye is wide open on Selected Value. Short-Term Corporate ETF Vanguard’s bond department is solid, and I still prefer its active management over indexing, but this is the highest- yielding short-maturity option in >

big gambles on financials and other down-and-out sectors and hasn’t always come out of it smelling so sweet. As you add more and more managers to a fund, good stock picks by one or two managers are often diluted by bad ones from the third. We are nowhere near the absurdity of Explorer, which has eight different management teams and hence

panies, which held up better than com- petitors in both the tech crash of 2000– 2002 and the credit crisis of 2007–2009. Losing less is a good strategy for grow- ing money over time, and that’s why I use this ETF to target the large-growth space in the Growth Index Model . Selected Value This has been a standout fund at Vanguard over the years and remains a solid buy for the moment, but Vanguard is on an inexorable path to diluting its stock-picking excellence. Jim Barrow is slated to step away from the fund in mid-2015, and while I hold Barrow in the highest regard, his departure isn’t what has my antennae twitching. Barrow’s longtime co-man- ager, Mark Giambrone, is proving to be a more-than-worthy successor and will continue to carry on the Barrow style and tradition. It’s not the poor 2014 performance which has caught my attention, either. Selected Value’s 6.4% return in 2014 was well behind MidCapValue Index ’s 13.8% gain, but in a year when REIT Index far outpaced the market, gaining 30.1%, I might expect Selected Value to trail. While the index allocates about 5% of its portfolio to REITs (it has been closer to 15% in the past), Selected Value’s managers have typically been more skeptical of the sector and have remained light in their REIT holdings. What’s got me concerned about Selected Value is Vanguard’s decision to add more managers rather than close the fund to new investors. It’s been nearly 10 years since Donald Smith and Co. was added to Selected Value and the fund settled into a consistent mold, with Barrow and Giambrone investing three- quarters or so of the assets and Smith overseeing a quarter. The portfolio con- sistently held 60 to 70 stocks, with about 25% of assets in the top holdings. In March 2014, Vanguard added a third sub-adviser, Pzena Investment Management. Pzena quickly became responsible for 12% of the fund (mostly at the expense of Barrow and Giambrone), and the number of hold- ings jumped to 125 or so. Pzena’s long- term record may be stellar, but it’s taken

DISTRIBUTIONS TO COME Quarterlies Plus

IT’S THAT TIME OF YEAR AGAIN. While the December distribution period seems like it happened just a couple of weeks ago, time marches on, and March marks 2015’s first round of quarterly distributions, as well as any supplemental distributions that Vanguard must pay out. Supplemental distributions are gains or income that were earned but not distributed in 2014 and must be paid out before the end of the first quarter to keep funds in compliance with SEC regulations. Health Care and Energy are habitual supplemental distributors of both income and capital gains. Vanguard’s mid-cap and small-cap index funds have consistently distributed a little extra income (not capital gains) in March, and last year all of Vanguard’s short-term and intermediate- term Treasury, investment-grade and index bond funds paid out extra capital gains, as did Long-Term Investment-Grade and Total Bond Market Index . Dividend Growth , Extended Market Index and Tax-Managed Capital Appreciation also paid out supplementals in March 2014. That being said, at year-end few funds had large realized capital gains on their books, with the largest held by MidCap Growth , Capital Value and Global Minimum Volatility. Vanguard should have the data for 2015 out by early March. As a reminder, I encourage taxable investors to direct distributions to money market accounts instead of reinvesting immediately in the fund where the distribution came from (something I practice with my own money). This allows you the flexibility to redeploy the money to underper- forming funds or to pay a tax bill without having to sell shares down the road. The list of regular quarterly income payers is below:

Short-Term Inflation-Protected Index STAR Conservative Growth STAR Income Target Retirement Income Tax-Managed Balanced Total International Stock Index Total Stock Market Index Total World Stock Index Utilities Index Value Index Wellesley Income Wellington World ex-U.S. Index World ex-U.S. SmallCap Index

500 Index Balanced Index Convertible Securities Developed Markets Index Dividend Appreciation Index Emerging Markets Index Equity Income European Index Financials Index Global ex-U.S. Real Estate Index Growth Index High Dividend Yield Index Inflation-Protected Securities LargeCap Index Pacific Index REIT Index

Remember, the ETF shares of the funds listed above will also pay out distributions. Additionally, a few other ETFs are scheduled to pay out regular quarterly income:

Russell 1000 Growth ETF Russell 1000 Value ETF Russell 3000 ETF S&P 500 Growth ETF S&P 500 Value ETF

Extended Duration Treasury ETF MegaCap ETF

MegaCap Growth ETF MegaCap Value ETF Russell 1000 ETF

The Independent Adviser for Vanguard Investors • March 2015 • 15

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