(PUB) Investing 2015

measure performance over one stat- ic, artificial time period simply doesn’t reflect the investor experience. The solution is to look at multiple time periods to accurately measure fund performance that more closely aligns with an investors’ true experience. For instance, over a full decade, there are actually 61 different five-year periods, 85 three-year periods and 109 one-year periods you can measure if you roll forward month by month. Using “roll- ing returns” analysis, something Jeff and I do all the time, is just one way to raise your odds of finding active fund managers who have outperformed and will continue to outperform the market or their benchmarks consistently. In addition, investors can narrow their search by building portfolios of funds that share the same characteris- tics as the best index funds—low costs and diversification. One need look no further than the content of this letter and the Vanguard fund family for proof. Consider, for example, Vanguard’s > portfolio is more nuanced.” So, while a substantial portion of investors’ curren- cy risk is hedged at Managed Payout , Vanguard has decided that for set-it- and-forget-it investors, the target mar- ket for the Target Retirement and STAR Lifestrategy funds, it is better to take on currency risk than to hedge it. Get Active Getting back to Global Minimum Volatility, there is a third factor to keep in mind: This is an actively managed fund. Currently, the fund holds 400 or so stocks, compared to the roughly 7,000 stocks that Total World Stock holds. With a turnover just shy of 50%, Global Minimum Volatility’s portfolio is far from static. In just 15 months of life, the allocation to European stocks has ranged from 16.5% to 23.7% of assets. Or con- sider the allocation to Japan, which has swung from 3.1% to 7.2% of assets. On top of the active component, the minimum volatility focus has led to some sector biases relative to a tradition- CONVENTION FROM PAGE 7 >

flagship 500 Index , which tracks the S&P 500 index. At the end of 2014, you might have looked at the fund’s 20.2% three-year annualized return and compared it to the actively run Dividend Growth , where manager Donald Kilbride had generated a 17.5% annualized return over the same period. With a higher return for the three years through 2014, you might have con- cluded the index fund was the preferred option. Yet, had the investor compared the two funds one year earlier, he would have drawn the opposite conclusion. Rather than using a static three-year measure, though, a rolling-return cal- culation shows that since taking charge of Dividend Growth in February 2006, Kilbride’s average three-year return of 8.3% was fully 1.6% better per annum than the index fund’s. In fact, sev- eral active managers running low-cost Vanguard funds have similarly beaten the index benchmark. The same benefits that accrue to index fund investors, such as low oper- al index that have so far been persistent. In the table above, Global Minimum Volatility is overweight higher-yielding sectors like utilities, real estate and communication services compared to Total World Stock and Global Equity. So make no mistake, the fund man- agers are very active, and their portfolio looks very different from Total World Stock Index. As a result, I expect its performance to be different—at times 13.7% 13.3% 11.5% Consumer Defensive 14.5% 9.7% 9.4% Health Care 12.6% 10.2% 12.0% Industrials 14.9% 12.7% 11.6% Real Estate 7.9% 1.6% 4.0% Technology 6.0% 17.0% 13.3% Energy 2.7% 4.5% 7.1% Financial Services 9.2% 22.7% 17.2% Utilities 7.7% 0.8% 3.4% Source: Morningstar. Vanguard Global Funds’ Sector Tilts Global Min. Volatility Global Equity Total World Stock Basic Materials 2.8% 4.0% 6.0% 7.9% 3.4% 4.4% Communication Svcs. Consumer Cyclical

ating costs and low turnover, can be found at funds run by human manag- ers—you just have to look for them. Comparing the performance of every portfolio in the mutual fund universe to a single index over a single period of time is a poor substitute for careful, considered research seeking to find the best flesh-and-blood managers on and off Wall Street. Investors can choose expediency and simply buy an index fund, but experience shows that spending a lit- tle time focusing on one of the most important financial decisions you will ever make to find smart, capable and consistently superior active fund man- agers could mean the difference of tens of thousands, if not hundreds of thousands of dollars in retirement. As Vanguard founder Jack Bogle has writ- ten, “Seemingly small differences in annual rates of return can result in enor- mous differences in total return over long periods of time. Do not ignore the magic of compounding.” n for the better, and at times for the worse. One thing that I think is important to acknowledge is that the three manag- ers, who co-manage 12 Vanguard funds in all, have a dismal record of investing alongside shareholders (though one of them has some serious skin in Global Minimum Volatility’s game). None of the managers are invested in nine of the 12 funds they work on—includ- ing Strategic Equity and Strategic Small-Cap Equity , where they man- age the entire portfolio as opposed to only a portion of it. Stetler has noth- ing invested in any of the funds he manages. Michael Roach has between $50,001 and $100,000 in both Windsor II and Explorer . However, he only has a token investment of no more than $10,000 in Global Minimum Volatility, while Troyer has a meaningful invest- ment of $500,001 to $1 million in it. At least one of the managers is showing some conviction in the strategy. Going Forward Bringing it back to where I started, Global Minimum Volatility has got-

14 • Fund Family Shareholder Association

www.adviseronline.com