(PUB) Investing 2015

the first 21 full months it has been in business, there have been nine months when Total World Stock Index declined. During those months, Global Minimum Volatility outperformed the index fund by an average 2.0 percentage points. In the other 12 months, when Total World Stock Index was up, that index fund’s outperformance averaged a minuscule 0.3 percentage points. In fact, Global Minimum Volatility outperformed the index fund in up months more than half the time. That’s impressive. What’s going on here? Well, Jeff and I gave you some thoughts in the April letter, but here are the basics: The fund’s objective is to have broad, global stock exposure with less volatility by building a portfolio of stocks that have exhib- ited historically lower volatility but also fit the parameters of a portfolio that doesn’t differ in its industry exposures from the benchmark. In addition, the fund’s managers attempt to minimize or eliminate currency risk. With the dol- lar’s strong climb of between 15% and 20% against currencies like the yen and the euro, currency hedging has contrib- uted mightily to performance. Have investors found this fund yet? Well, it got a running start at incep- tion when Vanguard allocated 20% of Managed Payout ’s assets to it, though in August it was cut back by about 5% as money was shifted to the newer Alternative Strategies and to bulk up Total International Stock a bit. So, about one-quarter of the fund’s assets can be accounted for by Managed Payout. Beyond that, inflows have been steadily rising since late last year. Global Minimum Volatility has merit, and even more so as long as the dollar remains strong. Once the cur- rency tables turn, however, outperfor- mance may fade, and if it does, inves- tors may sell as quickly as they bought. It’s too soon to tell, but right now this fund definitely earns its Buy rating. International Explorer Hold. As I’ve said many times, this fund faces stiff competition from its passive cousin, World ex-U.S. SmallCap Index , but at present it’s winning the race. >

It should be noted that the two funds’ benchmarks are different, with the active fund measured against an S&P index and the index fund mea- sured against a FTSE index. Regardless of benchmarks, though, International Explorer , like the index fund, is focused on small-cap foreign stocks. In my mind, that long-term objective should favor active management, since separating the wheat from the chaff is critically important when selecting among smaller foreign firms operating in multiple countries using multiple currencies and reporting under multiple accounting rules and regulations. But how it’s being executed may ultimately be International Explorer’s downfall. Schroder Investment Management’s team, led by MatthewDobbs in London, can take credit for the fund’s early suc- cess. (This is the same Schroders that oversees a portion of International Growth .) Dobbs says that superior earnings growth is the key to the fund’s investment strategy. However, after a fantastic run as a tiny fund, Schroders’ performance turned lackluster. The addition of Wellington Management’s Simon Thomas to the fund didn’t seem to make much of a performance difference initially, but he seems to have gained some mojo over the last couple of years, helping returns. One important factor that makes this fundworthy is that, alongwith Emerging Markets Stock Index and World ex-U.S. SmallCap Index, it has the lowest cor- relation with U.S. markets. By knock- ing the fund’s minimum from $25,000 down to $3,000, Vanguard has made this diversifying fund more accessible to smaller investors, but whether it’s the best for your portfolio is a question I’m asking myself more and more these days. If you own it, okay. But I am not pounding the table to buy it. International Growth Buy. I always considered this fund’s former lead manager, Richard Foulkes, one of the best of the breed among international investors. Since he retired 10 years ago, in October 2005, though, Foulkes’ replacements have slowly seen their portion of the portfolio eroded as

more money was given to two relative newcomers, one of which now leads the show. Today, Baillie Gifford handles a bit more than 50% of assets, and M&G Investment Management runs 13% or so, leaving Schroders with a bit more than one-third of the fund’s assets. Unlike many of Vanguard’s multi- managed fund messes, this trio hasn’t exploded the portfolio to hold hundreds of stocks—it currently has less than 170, and the top 10 represent almost one-quarter of the fund’s assets. That’s solid. And performance has been, too, with International Growth outpacing Total International Stock Index consis- tently over time. That doesn’t mean the fund will outpace the index month after month. In fact, over the almost three years since Baillie Gifford’s weight in the fund stabilized at around 50%, International Growth has only outpaced the index in 16 of 33 months. But its outperformance more than makes up for its underperformance, hence my Buy rating here. International Value Hold. I’ve referred to International Value as something of a multimanaged mess in the past, with four separate teams (AllianceBernstein, Edinburgh Partners, Hansberger Global Investors and Lazard Asset Management) all han- dling pieces of the pie. But a couple of those managers have been fired and the new makeup hands one-quarter of fund assets to ARGA Investment Managed (hired in 2012), 35% to Lazard (on board since 2006), and almost 40% to Edinburgh Partners (who’ve been here since 2008). It wasn’t until around 2011 that performance began to pick up, though like International Growth, the month-to-month outperformance or underperformance relative to Total International Stock is all over the map. Over the past few years, International Growth and International Value have run about neck-and-neck, and the lat- ter’s portfolio of 155 stocks is also more concentrated than in years past, though just 17.4% of assets are in its 10 largest holdings. With all the manager musical chairs of the last few years,

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