(PUB) Investing 2015

Index’s relative performance against Total International Stock, as well as Pacific Index’s relative performance, has been all over the map and, ultimate- ly, led you right back to about equal performance over the entire period. Finding the right entry and exit points (you’d want to buy just before the line starts rising, and sell before it falls), would be incredibly tough to do. Again, what advantage do you think you have over the experts? Yes, there are ETF shares (VGK) available. But why bother? Global Equity Hold. Firing AllianceBernstein may have been one of the best moves Vanguard’s ever made. (After axing former Growth Equity manager Turner Investments, that is.) Not only did AllianceBernstein do a terrible job running domestic growth stocks, but since the team was taken off the ros- ter of this world-stock fund and much of its portfolio allocation was handed to Baillie Gifford, Global Equity has begun to show some of its old luster. Original manager Marathon Asset Management generated strong returns when Global Equity got its start. Today, Marathon’s allocation in the portfolio is down to a third of assets, and Baillie Gifford and Acadian each run anoth- er third. Since redistribution of assets occurred around March 2013, Global Equity has outperformed Total World Stock Index , with about the same allo- cation of U.S. and non-U.S. stocks, by about 30%, rising a total 16.5% com- pared to the index fund’s 12.6% gain.

EmergingMkts. Select Stock vs. EmergingMkts. Stock Idx.

Global Equity vs. Marathon and TotalWorld Stock Index

0.96 0.98 1.00 1.02 1.04 1.06 1.08 1.10 1.12

0.60 0.70 0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60

Rising line = EM Select Stock outperforms

Rising line = Global Equity outperforms Acadian Asset

Baillie Gifford hired (fourth manager)

Management joins Marathon on fund

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▼ Alliance Bernstein hired (third manager)

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▼ AllianceBernstein fired

Global Equity vs. Total World Stock Idx. Global Equity vs. Marathon Global Equ.

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Interestingly, the fund still hasn’t performed as well in its new form as it would have under sole management by Marathon. That lower line in the graph above shows Global Equity’s performance against Marathon’s solo effort. Relative performance is improv- ing, however, which bodes well for shareholders going forward. I continue to believe that a global fund can make a great core holding for those with smaller portfolios who are looking for exposure to foreign stocks. But I do think you have to temper it with at least one or two domestic funds to avoid excessive foreign exposure. One thing is clear, though, and that is that active management can win the day, and here it has. Global Minimum Volatility Buy. Out of the gate, Global Minimum Volatility has put up terrific numbers when compared to its global counterparts. Granted, the fund has only been open since mid-December 2013, so the record is short and has taken place in a period of rising domestic mar- kets and falling foreign markets, but risk aversion has worked. From inception through the end of September, the fund is up 20.9% versus just 10.8% for Total Stock Market , a loss of 7.0% for Total International Stock Index and a gain of just 1.6% for Total World Stock Index. Score one for Vanguard’s actively man- aged global stock fund. If I had to summarize what’s made this fund work so far, it’s that it has outper- formed more in down markets than it’s underperformed in up markets. Over >

value. Further, it should be noted that the sleeve managed by Wellington is composed of stocks selected by a team of global industry analysts. So there are actually dozens of cooks stirring the pot here. While the fund’s relative perfor- mance, as you can see in the chart above, was strong in the early innings, it’s faded fast. Okay, I’ll admit that the active fund has only been around for just a bit more than four years, but so far performance doesn’t look anything more than average. I believe this fund is another classic case of Vanguard handi- capping its subadvisors heavily enough to ensure a boring race. European Index Hold. As if changes across the euro zone weren’t enough to keep investors guessing, Vanguard has also changed the benchmark index for this fund yet again, taking on a slew of small-cap stocks in the process; the new bogey is the FTSE Developed Europe All Cap index. Based on historical data for the old and new indexes, the addition of smaller stocks has only added margin- ally to performance over the dozen or so years for which data is available. So, don’t expect some supercharged index fund to emerge from this shift. I’ve never been a big fan of Vanguard’s sector foreign funds, because, well, active managers have shown they can outrun the indexes pretty darned consistently. What do you know about Europe that they don’t? Plus, take a look at the chart to the right. Over the past 10 years, European

Relative Performance Changes Quickly

1.05 1.10 Rising line = Regional funds outperform

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European vs. Total International Index Pacific vs. Total International Index

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The Independent Adviser for Vanguard Investors • November 2015 • 13

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