(PUB) Investing 2015

given tax year. (This will be more of a concern for the youngest investors.) In any case, helping to put your teen- age child or grandchild on the road to a more comfortable retirement may truly be one of the best gifts you can make, and it will be one that keeps on giving year after year. n

will need to begin filing their own tax returns. And, as I mentioned earlier, con- tributions to a Roth IRA are not made pre-tax, as they would be on a tradi- tional IRA. Also, be aware that if you do help your child by contributing on their behalf, the total amount put into the IRA cannot exceed their total earnings in any

until April 15 to fund an IRA for 2014, and then if they earn some money this year you or they can add money for 2015 as well. Remember, the longer you or your children wait, the smaller your potential compounded earnings. Of course, with income comes taxes, and your children

MINIMUM VOLATILITY Going Against Convention

However, index provider MSCI has back-tested its low-volatility strategy and has used it to piece together data going back to mid-1993 that can pro- vide more perspective. The chart to the left shows the relative performance of the MSCI All Country World Index (ACWI) versus a minimum volatility version of that same index. When the line is rising, the traditional ACWI index is outperforming, and when it is falling, the minimum volatility version is out- performing. Over the period for which MSCI has data, the minimum volatility index outperformed the traditional index by 1.5% a year, generating a 9.1% annu- alized return versus a 7.6% return. You can see that the periods when the minimum volatility index outper- formed most substantially were, not sur- prisingly, during the two bear markets I mentioned earlier. While the MSCI ACWI index declined 46.3% as the tech bubble burst, the minimum volatil- ity index only dropped 18.1%. In the credit crisis, when the traditional index tumbled 54.6%, the minimum volatility index fell 38.6%. As this is a minimum volatility story, and Vanguard references the calcula- tion in the fund’s annual report, let’s talk standard deviation. Standard devia- tion is a measure of volatility that the financial world often equates to risk. Specifically, standard deviation measures how much a fund’s returns strayed from its average. The higher the standard deviation, the more a fund’s returns varied over time. Over the 20-plus year period for which MSCI has data, the minimum volatility index

WE ALL WANT TO HAVE our cake and eat it, too. For investors, the equivalent would be a fund that delivers all of the returns of the stock market without the risk, or at least with a lot less risk. Vanguard’s newest actively managed stock fund, Global MinimumVolatility , is gaining attention as a fund that might leave you with a full stomach and a smile. Investors have added over $200 million to the young fund over the past five months, so let’s see what all the fuss is about. As the inflows suggest, the fund’s off to a good start. Global Minimum Volatility’s 23.6% gain since its December 2013 inception is well ahead of in-house competitors Total World Stock Index ’s 11.4% gain and Global Equity ’s 13.2% return. The fund’s clos- est low-volatility competitor, iShares MSCI All Country World Minimum Volatility ETF (ACWV), only returned 18.5% over that stretch. But 15 months is too short a timeframe to declare any fund an unbridled success. Let’s take a step back and consider the strategy behind Global Minimum Volatility. The fund is managed by a trio from Vanguard’s in-house Equity Investment Group—James Troyer, James Stetler and Michael Roach. They are Vanguard’s go-to crew for quan- titatively managed (computer-driven) stock portfolios. Their aim is to build a portfolio that has broad global stock exposure but less volatility than the global stock market index. The managers employ two key strat- egies toward achieving this goal. One is constructing a basket of stocks that exhibit lower volatility than the market

MinimumVolatilityWins By Losing Less

0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4

Bear Market Rising Line = Traditional Index Outperforms

2/95

2/97

2/99

2/01

2/03

2/05

2/07

2/09

2/11

2/13

2/15

as a whole. This doesn’t just mean pick- ing the lowest-volatility stocks around, but also considering how those stocks come together in an overall portfolio. Vanguard also has some self-imposed constraints to keep the portfolio from becoming overly concentrated in one sector or region. The second compo- nent to the strategy is the use of hedges to minimize or eliminate foreign cur- rency risk completely. Minimum Volatility The first question you might ask is, does it make sense to own a basket of low volatility stocks? Unfortunately, real-world low-volatility strategies are relatively new—largely developed in response to investors who were burned by two major bear markets inside of 10 years (the tech crash and then the credit crisis), and didn’t believe they could handle another price-crushing decline. The earliest minimum volatility ETFs were only launched in 2011 and haven’t been tested in a bear market in real time.

6 • Fund Family Shareholder Association

www.adviseronline.com