(PUB) Investing 2015

have begun to notice near-term per- formance, have assets grown. I would not be a buyer of Strategic Equity, and if you happen to be talk- ing to a Vanguard financial planner who recommends the fund, ask him or her whether they themselves own any shares, or whether they know if any of the managers or executives who’ve told them to recommend the fund own any shares in it. Then show them the graph comparing its performance to Extended Market Index. That planner might also suggest you buy Extended Market Index, another one of Vanguard’s regu- lar recommendations that didn’t make the Select Fund list. After the planner has said his or her piece, walk away. Windsor II When Jim Barrow of Barrow Hanley ranWindsor II solo, it was a great large- cap value fund with a strong style of buying companies with good dividend yields and low price-to-earnings ratios. And the portfolio was relatively tight, as Barrow focused on the companies he liked the best rather than diwor- sifying the fund. If you take a look at Diversified Value Annuity , which Barrow’s firm still runs solo, you’ll see a portfolio of just 44 stocks at the most recent report. By contrast, Windsor II, with its current roster of five manage- ment teams made up of 12 portfolio managers, holds 258 stocks. Since the annuity’s inception, it has generated an average rolling five-year return of 6.8% annualized, compared to Windsor II’s average of 6.2% over the same period. Over the past decade, as managers have come and gone from Windsor II, the annuity (which has a higher expense ratio) and the fund have about paced one another, though the annuity’s longer-term performance still beats the larger and cheaper Windsor II. Only two of Vanguard’s directors own shares in Windsor II, and one of them only made his first purchase in 2014. Vanguard’s chairman does not have a stake in Windsor II. As for the fund’s managers, it should prob- ably come as no surprise that Barrow, who’s been managing money here for decades, has over $1 million invested in >

Strategic Equity vs. Extended Market Index Rising line = Strategic Equity outperforming

ActiveManagement Outperforms

0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5

0.85 0.90 0.95 1.00 1.05 1.10 1.15 1.20 1.25 1.30

Rising line = Active fund outperforming

International Growth vs. Total Int'l International Value vs. Total Int'l

3/97

3/99

3/01

3/03

3/05

3/07

3/09

3/11

3/13

3/15

3/97

3/99

3/01

3/03

3/05

3/07

3/09

3/11

3/13

3/15

Windsor II. His two co-managers have between $100,001 and $1 million in the fund, and Vanguard’s Michael Roach has between $50,001 and $100,000 invested here. Besides those four man- agers, there’s not another dime from any of the portfolio jockeys at Lazard, Hotchkis and Wiley, or Sanders Capital in the fund. If Windsor II is a Select Fund , then what should we make of a fund like Dividend Growth, which is also a large- cap, value-oriented fund and the better performer? Is it a Super Select Fund ? Believe me, I don’t need hordes of shareholders beating down the doors at Dividend Growth, overwhelming man- ager Don Kilbride with assets, so I’m happy if Vanguard wants to promote Windsor II to the uninitiated. But you and I know a lot better. Emerging Markets Stock Index andTotal International Stock Index In the old days, Vanguard offered its Developed Markets Index as well as Emerging Markets Stock Index and then mixed and matched them to get you an allocation that made up Total International Stock Index. Individual investors could buy the broad fund or mix and match the two funds for themselves depending on their risk tol- erance, going a bit heavier or lighter on the emerging markets component for instance. But with the Select Funds I’m assuming that Vanguard expects the DIY investor to choose the broad index fund most of the time and, if they’re feeling frisky, to add the higher-risk emerging markets fund as well.

Total International Stock Index is a fine fund as index funds go. But as you’ll read in a moment, I think Vanguard’s got a better option when it comes to broad foreign stock exposure. As for Emerging Markets Stock Index, while its actively managed com- petitor, the relatively new Emerging Markets Select Stock , was a strong challenger out of the gate, it’s lost most of its advantage, and the funds’ perfor- mance since the latter’s 2011 inception is about neck-and-neck. Both of these funds are very popu- lar with Vanguard’s directors, as all but two of the 10 have stakes worth more than $100,000 in one or both. And while manager Michael Perre has between $100,001 and $500,000 in Total International Stock, his stake in the EM fund has dwindled from between $50,001 and $100,000 to a more modest $10,001 to $50,000. Frankly, I don’t think you need both of these funds in a portfolio, but of course Vanguard doesn’t want to pick sides, so it takes the easy route and says both broadly diversified active funds are Select Funds . In fact, when mea- sured against Total International Stock Index, both of these funds could be “select,” since both have outperformed it, as the relative performance chart at the top right illustrates. As you can also see, there are defi- nitely periods when the index fund takes the upper hand, but if you’re an investor rather than a trader, you’ll earn more International Growth and International Value

14 • Fund Family Shareholder Association

www.adviseronline.com