(PUB) Investing 2016

index has led and times where it has lagged, but over the past decade or so, its performance hasn’t been all that different from either Total International Stock Index or Developed Markets Index , and lately it has been underperforming. International High Dividend Yield Index aims to track a brand new index, the FTSE All-World ex-U.S. High Dividend Index. As with any fund that doesn’t look quite like the market, you can expect periods when International Dividend High Yield Index will outper- form and periods when it will underper- form the traditional foreign index funds. But why rush in here when we have a proven option in International Growth ? What Vanguard isn’t doing is offering actively managed counterparts to these funds, as they do domestically. Dividend Growth and Equity Income are both benchmarked to the same indexes used by the domestic DividendAppreciation Index and High Dividend Yield Index funds. And the active managers have run circles around their index competitors. New Bond Funds Let’s turn to the more traditional sources of income—bonds. Emerging Markets Bond was launched with lit- tle fanfare in early March. The fund is run by Dan Shaykevich, a former member of BlackRock’s emerging mar- kets debt team, and will go toe-to-toe with Emerging Markets Government Bond Index . Though the fund’s Investor and Admiral shares have been pricing since early March, neither are available for purchase today. Vanguard says that a Vanguard subsidiary is the “sole investor in the fund” as Vanguard wants to “confirm our active emerg- ing market capabilities,” which I guess means they want to make sure they know what they’re doing in the space. The final new fund, and the one I’m most interested in, is Core Bond, man- aged by a trio of Vanguard managers. The fund will go head-to-head with the largest bond fund in the world— Total Bond Market Index . As Core Bond is less than a month old, Vanguard is not reporting any portfolio data for the fund, but expect it to invest in investment-grade-rated gov- ernment, agency and corporate bonds. >

rush into it, as I think it will take some assets to build the diversified portfolio Vanguard needs to make the fund sing. Still, I rate it Buy and think this fund will do well. First, three accomplished managers will run it. Second, Vanguard keeps very tight reins on its active bond funds, prescribing limits on the amount of duration (risk) the managers can take vis-à-vis their benchmarks, as well as how far outside the benchmark the man- agers can go when searching for bonds. Add all that up with expense ratios that are just five to eight basis points higher than Total Bond Market’s comparable share-class expenses, and you’ve got a pretty low hurdle for the managers to clear to prove their security-selection chops. In the end, Vanguard is broadening its income solutions with these four funds, though none of them is a must- own today. I’ll keep you apprised as we see how they perform. n

Foreign “Achievers” Show Similar Performance

0.75 0.80 0.85 0.90 0.95 1.00 1.05 1.10 1.15 1.20

Rising line = Dividend Achievers Index outperforms

Int'l Dividend Achievers vs. Total Int'l Stock Int'l Dividend Achievers vs. Developed Markets

12/05

12/06

12/07

12/08

12/09

12/10

12/11

12/12

12/13

12/14

12/15

Vanguard’s marketing focus on its indexed bond funds, in particular Total Bond Market Index, has overshadowed the excellent performance of its active funds, like Short-Term Investment- Grade and Intermediate-Term Investment-Grade . Core Bond has the potential to outshine Total Bond Market Index over time. But I wouldn’t

MANAGED PAYOUT More of a Return of, Rather than a Return on Your Money

ONE CHANGE AT VANGUARD is no change at all. Managed Payout ’s 2016 monthly distribution is unchanged from 2015, at just a little under six cents per share ($0.0589) after a small increase last year. However, Vanguard now says that 67% of that distri- bution is a return of capital, versus about 57% last year. What this means is that Vanguard is unable to generate enough cur- rent income to keep the distribution even without dipping into capital. Those numbers could change if the fund starts generating more income as the year proceeds, but in my eyes, Managed Payout remains a lousy investment.

Managed Payout Assets Are Stagnating

$1,000 $1,200 $1,400 $1,600 $1,800 $2,000

Discontinued Managed Payout Portfolios Managed Payout

$0 $200 $400 $600 $800

1/09

1/10

1/11

1/12

1/13

1/14

1/15

1/16

Not a single Vanguard director owns the fund, nor has one ever owned the fund or its predecessors. If the Vanguard board doesn’t see fit to put a single, solitary dollar into this portfolio, why would you? The fund has the single worst record among Vanguard’s bal- anced funds and has generated less than half the total return of Wellesley Income since inception. In fact, Vanguard’s disclaimer on Managed Payout is longer than that for any other fund except Market Neutral —which, of course, is a component of the Managed Payout fund. Investors haven’t been fooled. The fund is barely taking in new money, and assets have stag- nated at about $1.6 billion—hardly a roaring success.

6 • Fund Family Shareholder Association

www.adviseronline.com