(PUB) Investing 2015

FUNDS OF FUNDS Targeting Cheaper Shares

AT ITS INCEPTION in 2005, Diversified Equity was marketed by Vanguard as a “starter fund for investors seeking a broadly diversified, low-cost equity portfolio,” according to then-Vanguard Chairman Jack Brennan. Some of the marketing for the fund, in fact, featured photos of bicycle training wheels. Calling it a “simplified solution” for an as-yet unidentified problem, Diversified Equity would become the only all-equity, all-active management portfolio among more than a dozen funds-of-funds at Vanguard. Large-cap growth and value funds would soak up about four times the assets of small- and mid-cap funds, making it similar in composition to a broad U.S. market fund like Total Stock Market Index . Then, as now, the fund offered no international diversification, which (as Vanguard has made abundant- ly clear over the years) is so important FUND OF FUNDS Older and Messier Well, now they’ve actually intro- duced a full lineup of Institutional Target Retirement Institutional shares (yes, that’s the name). The minimum investment is a cool $100 million if you buy one fund, but for institutions or, say, 401(k) plans, it’s $100 million across the entire family of Targets. Expenses will VANGUARD FINALLY TOOK my advice and is going to use institutional shares of its various index funds in its Target Retirement series of funds-of-funds. You may recall that in 2007 I suggested that the firm could and should use its institutional shares to lower the operat- ing expense ratios on its Target funds, particularly given that the funds are components in huge, extremely cost- efficient 401(k) retirement plans. I raised the issue again in 2011 when Vanguard began issuing lower-cost Target shares to monstrous institutional investors.

Lower Costs on Target

Fund. No.

Exp. Ratio $1,000 Minimums

Fund. No.

Exp. Ratio

$100 Million Minimums Ticker

Ticker

Institutional Target 2060 VILVX 1672 0.10% Target Retirement 2060 VTTSX 1691 0.18% Institutional Target 2055 VIVLX 1671 0.10% Target Retirement 2055 VFFVX 1487 0.18% Institutional Target 2050 VTRLX 1670 0.10% Target Retirement 2050 VFIFX 699 0.18% Institutional Target 2045 VITLX 1669 0.10% Target Retirement 2045 VTIVX 306 0.18% Institutional Target 2040 VIRSX 1668 0.10% Target Retirement 2040 VFORX 696 0.18% Institutional Target 2035 VITFX 1667 0.10% Target Retirement 2035 VTTHX 305 0.18% Institutional Target 2030 VTTWX 1666 0.10% Target Retirement 2030 VTHRX 695 0.17% Institutional Target 2025 VRIVX 1665 0.10% Target Retirement 2025 VTTVX 304 0.17% Institutional Target 2020 VITWX 1664 0.10% Target Retirement 2020 VTWNX 682 0.16% Institutional Target 2015 VITVX 1663 0.10% Target Retirement 2015 VTXVX 303 0.16% Institutional Target 2010 VIRTX 1662 0.10% Target Retirement 2010 VTENX 681 0.16% Institutional Target Income VITRX 1673 0.10% Target Retirement Income VTINX 308 0.16%

however, is that they specifically will be using institutional share classes for these high-minimum funds, which I find strange. But hey, if you’ve got $100 million to put into Institutional Target Retirement 2030 Institutional , then I guess you can do your own research. n

run about 0.10%, which is about what I calculated they’d be years ago had Vanguard used its lower-priced shares in the first place. The funds launched June 26. What Vanguard doesn’t say in its prospectus for these new Target funds,

or 500 Index , and the other half in Diversified Equity. As I’m sure you know, I wasn’t a fan when the fund was first proposed, and I was even less of one when it was intro- duced. But even I didn’t call the fund the “Stupid Investment of the Week,” as MarketWatch columnist Chuck Jaffe did. He wasn’t far off. ToTrack and Lag the Index So, how’d this “simplified solu- tion” work out for investors who put their money into Diversified Equity on the presumption that Vanguard’s well- chosen managers and low costs would add value to their portfolios? Well, let’s roll the video tape (or the DVR, given the changes in our media libraries that we’ve made over the last decade or so). While the lineup of eight Vanguard funds has remained the same over the

that Vanguard now recommends that no less than 40% of your equity holdings come from non-U.S. markets. At introduction on June 10, 2005, Vanguard cleared up one question, say- ing the fund would simplify investing because you’d have “no need to select individual stock funds that cover various market segments or to rebalance your fund allocation to control risk.” They also said that the fund would give inves- tors the opportunity to balance their index fund holdings “with the market- beating potential of actively managed funds,” and that with “[Vanguard’s] low costs and the talents of well-chosen managers—[Diversified Equity] can add value to an index portfolio.” Vanguard even suggested that one way to use the fund would be to invest half your money in a broad market index fund such as Total Stock Market

14 • Fund Family Shareholder Association

www.adviseronline.com