(PUB) Investing 2015

Diversified Equity’s 10-Year Anniversary

49 Heads AreNot Better Than One

Diversified Equity’s Growth Has Slowed

0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50

$1,000 $1,200 $1,400 $1,600 $1,800

June 10, ‘05 – June 10, ‘15

Diversified Equity Total Stock Market Index

Fund

Health Care

13.6% 10.9% 10.9% 10.7% 10.4% 10.4%

Capital Opportunity MidCap Growth

PRIMECAP

$0 $200 $400 $600 $800

SmallCap Growth Index

PRIMECAP Core

Assets (millions)

Extended Market Index

9.7% 9.7% 9.6% 9.6% 9.2% 9.1% 9.1% 9.1% 8.8% 8.7% 8.7% 8.6% 8.5% 8.5% 8.4% 8.4% 8.4% 8.2% 8.2% 8.0% 8.0% 7.9% 7.6% 7.5% 7.4% 7.4% 7.4% 7.3% 7.3% 7.3% 7.2% 7.1% 7.1% 7.0% 7.0% 6.9% 6.9% 6.6% 6.6% 6.5% 6.5% 6.2% 6.1% 6.0% 5.7% 5.7% 5.6% 5.4% 5.3% 5.3% 4.6% 1.9%

SmallCap Index

Tax-Managed SmallCap

MidCap Index Dividend Growth Selected Value

6/05

6/06

6/07

6/08

6/09

6/10

6/11

6/12

6/13

6/14

6/15

6/05

6/06

6/07

6/08

6/09

6/10

6/11

6/12

6/13

6/14

6/15

as those with money in Total Stock Market Index. Period. Essentially matching the index fund with a multimanaged mess like Diversified Equity is precisely what Vanguard is striving for, however. It isn’t interested in showing that active management can outperform, because, it would also have to admit to funds in its stable that underperform. That’s why many of Vanguard’s active funds have four or five or more management teams running different sleeves of the portfolio. If all those managers end up producing “average” returns when combined, they won’t deviate too far from the benchmark they’re supposed to be trying to beat. And as long as Vanguard’s active funds achieve the low hurdle of bench- mark-like returns, their low-cost advan- tage virtually guarantees the funds will outperform their average, more expen- sive peers. Vanguard’s marketing depart- ment can then (and does) highlight their peer-beating performance, which is due almost entirely to low fees, rather than above-average stock picking. By the way, while Diversified Equity and Total Stock Market were earning their 8.2% and 8.4% returns over the last 10 years, which funds were doing better? Pretty much every one of the domes- tic equity funds that you and I own, like Health Care (up 13.6%), Capital Opportunity (10.9%), PRIMECAP (10.7%), PRIMECAP Core (10.4%), Dividend Growth (9.2%) and Selected Value (9.1%). Compounded over 10 years, these funds have generated some astounding profits for you and me, >

last 10 years, management companies and individual portfolio managers have come and gone. Vanguard fired almost half of the original management teams on the fund, and they hired many, many more. The fund started life with 15 dif- ferent portfolio management teams running its eight component funds. Today there are no fewer than 20 teams made up of 49 portfolio man- agers (I miscounted when I said 51 last month), each picking stocks and throwing them into the pot that is Diversified Equity. In the end, the fund couldn’t quite keep up with Total Stock Market, though it gave it a good shot. Averaging a collective expense ratio of 0.41%, the fund was 24 basis points more expensive, on average, than Total Stock Matching the index fund with a multimanaged mess like Diversified Equity is precisely what Vanguard is striving for. Market. And over the past 10 years, its annualized return of 8.22% was 19 basis points behind Total Stock Market’s 8.41% return. Now, you could say that lagging by 19 basis points when the expense differential is 24 basis points is a win for the active side. That’s all well and good, except that, in the end, the investor who put their money into Diversified Equity didn’t do as well

Explorer

Growth Index

SmallCap Value Index

Strategic Equity Morgan Growth

Convertible Securities

Equity Income U.S. Growth

Total Stock Market Index Tax-Managed Capital Appreciation

Capital Value

Diversified Equity

LargeCap Index

Wellington

Emerging Markets Index

500 Index

International Explorer

REIT Index Windsor

International Growth

Social Index Windsor II

Target Retirement 2045

Growth & Income

Value Index

Balanced Index

STAR

Wellesley Income

U.S. Value

Target Retirement 2035

Global Equity STAR Growth

Tax-Managed Balanced Target Retirement 2025 STAR Mod. Growth Target Retirement 2015 International Value Total International Index Energy

European Index

Admiral Developed Markets

STAR Cons. Gro.

Target Retirement Income

Pacific Index STAR Income Market Neutral

Precious Metals & Mining 1.1% Note: 10-year annualized returns from 6/10/05 through 6/10/15.

The Independent Adviser for Vanguard Investors • July 2015 • 15

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