(PUB) Investing 2015

WHAT DO MOST INVESTORS do when markets are at their worst? Absolutely nothing. Yet an article posted late in the afternoon of Sept. 21 on The Wall Street Journal ’s website has raised hackles among bond fund manag- ers and investors—and in particular, Vanguard investors. The article, The New Bond Market: Some Funds Are Not As Liquid as They Appear (http://on.wsj.com/1MGD8A9), identifies a number of the largest bond funds in the U.S. and says their port- folios are rife with illiquid corporate bonds—meaning the funds are at risk of holding bonds that, unlike Treasurys, will be difficult to sell quickly to meet redemptions if bond markets tumble and investors flood the exit ramp. Topping the list of 18 funds was none other than High-Yield Corporate , one of six Vanguard funds under scrutiny. But let’s think about this for a moment. Central to the concern voiced by many in the media and the invest- of the NASDAQ International Dividend Achievers Index called the NASDAQ International DividendAchievers Select Index. (The non-Select index dates to September 2005 and is tracked by the PowerShares International Dividend Achievers ETF, symbol PID, with a bit more than $1 billion in assets.) The high-yield fund will track a brand new index, the FTSE All-World ex-U.S. High Dividend Index. What Vanguard isn’t doing is offer- ing actively managed counterparts to these funds, as they do domesti- cally. Dividend Growth and Equity Income are both benchmarked to the same indexes used by the domestic Dividend Appreciation Index and High Dividend Yield Index funds. And that’s too bad, because the active managers have run circles around their index competitors. Since the index fund’s inception, Wellington’s Don Kilbride, BONDS Liquidity and Safety 1.00 1.05 1.10 1.15 1.20

Equity Income vs. High Dividend Yield Index *

Dividend Growth Under Kilbride

1.10

Rising line = Equity Income outperforms High Div. Yld. Idx.

Rising line = Dividend Growth outperforms Dividend App. Idx.

1.08

1.06

1.04

1.02

▼ High Dividend Yield Index fund inception 11/06

1.00

0.98

0.96

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

8/12

8/13

8/14

8/15

8/06

8/07

8/08

8/09

8/10

8/11

8/12

8/13

8/14

8/15

*Includes indexdata from2004 to2006.

who took the reins on Dividend Growth almost 10 years ago, has generated a total return of 108.5% versus the index fund’s 80.7% return, more than 34% better. Since High Dividend Yield Index’s inception in 2006, that fund has returned 63.4% versus the 73.1% return for the actively managed Equity Income.

Again, the active managers have consis- tently outperformed, as the charts show. So, in the end, Vanguard is simply broadening its index-fund lineup with a couple more overseas funds, slicing the indexing baloney ever finer in the hopes of attracting investors with a desire for yield, no matter where it comes from. n

Cash Flows During Bond Crises THE FINANCIAL CRISIS

2008 Flow % of Assets Year-End Assets

Short-Term Investment-Grade Intermediate-Term Investment-Grade Intermediate-Term Bond Index

($1,128) $1,489 $1,015 $6,123

-6% 21% 12% 8% -2% -1%

$17,743 $7,057 $8,621 $72,851 $5,904 $6,963

Total Bond Market

Long-Term Investment-Grade

($90) ($100)

High-Yield Corporate

LARGEST 12-MONTH OUTFLOWS

Net Outflow % of Assets

Assets

Period

Short-Term Investment-Grade Intermediate-Term Investment-Grade Intermediate-Term Bond Index

($1,765) ($3,033) ($2,922) ($1,200) ($1,575) ($3,290)

-5% $37,051 -18% $16,559 -21% $14,080 -1% $185,240 -11% $14,132 -21% $15,896

Dec.10–Nov.11 Dec.12–Nov.13 Feb.13–Jan.14 Mar. 13–Feb.14 Sept.14–Aug.15 Oct.12–Sep.13

Total Bond Market

Long-Term Investment-Grade

High-Yield Corporate

don’t push the sell button; instead, they stay in their seats. Let’s analyze a couple of Vanguard’s funds on the WSJ ’s list. Looking back to 2008, arguably the most stressful time in the high-yield bond market’s history, investors pulled a net $100 million from High-Yield >

ment universe about liquidity, or the lack of it, in the bond market is the belief that at the first sign of falling bond prices, investors will head, en masse, for the exits only to find the way out a lot smaller than expected. What that script misses is the fact that the vast majority of investors don’t panic and

The Independent Adviser for Vanguard Investors • October 2015 • 15

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