(PUB) Investing 2016

As you can see in the timeline on page 14, the U.K. and the E.U. haven’t always been on the same page. While the June 23 vote led to some dramatic changes in currencies, prices and expec- tations, it doesn’t actually change >

vote: In the two days after the vote, European Index fell 13.6%, and the pound sterling tumbled 11.1%, Total Stock Market Index dropped 5.6%, and the yield on the 10-year Treasury went from 1.74% to 1.46%.

whether to focus here versus there is not as easy as the sound-biters would have you believe. Just look at the past eight or so years on the aforementioned relative performance chart. U.S. stocks have the edge in performance over the full time period—though in another six or seven years that might change completely. Yet it was anything but an easy victory. If you can time those swings, you are far smarter than I am. Brexit in Focus How does the Brexit fit into all of this? First off, the fundamental and philosophical reasons for having an allocation to foreign stocks have abso- lutely nothing to do with whether the U.K. is part of the E.U. or not. Maybe the Brexit vote has converted you to Bogle’s way of thinking and you are committing to own all U.S., all the time. Okay. But if you own foreign stocks today and are thinking of sell- ing them because of the Brexit vote, recognize that you are making a mar- ket call—that foreign stocks are not worth owning at this time. And you’re making that decision after, not before, they’ve taken a turn to the downside. As I said above, I think market timing is very tough. Not only do you have to be right that this is the time to get out of foreign stocks, but you also have to figure out when to buy foreign stocks in the future, because I know you’ll want to do so when they start outperforming U.S. stocks. Make no mistake, global commerce will continue. What exactly a new agreement between the U.K. and the E.U. will look like is unknown. Plus, the U.K. will also have to renegotiate treaties with other countries like the U.S., China, India, etc. The U.K. is the fifth-largest economy in the world, and at 6.7% of Total World Stock Market Index, is the third-largest stock market after the U.S. and Japan. The U.K. is Germany’s third-largest export mar- ket, and the fifth-largest for Italy and France. So its decision to leave the E.U. is absolutely disruptive to the global economy and markets. This was reflected in the mar- ket’s immediate reaction to the Brexit

MULTIMANAGERS Another Team Bites the Dust

VANGUARD HAS BECOME the cheerleader for the “If one advisory team is good then two must be better” philosophy underpinning its multimanager funds. In fact, the company’s recent web posting trying to argue for multimanagers is something I took to task in the June 2016 issue of the Independent Adviser for Vanguard Investors . So, how to explain the June 6 announcement that one-third of Explorer Value ’s three- adviser portfolio team is being pink-slipped with no replacement named? Has Vanguard decid- ed that, indeed, two management teams might be better than three? As you may recall, it was only in January that Vanguard reduced the adviser counts on Explorer and Morgan Growth by one team each—though both remain, in my view, a multimanager mess. I asked Vanguard, which offered no rationale for this change in its terse announcement, why

Sterling Capital Management was being let go, and its responsibilities (assets) being re- distributed to the remaining two management teams at Frontier Capital Management and Cardinal Capital Management. They didn’t really give me an answer other than to say that the fund’s trustees—none of whom owned a single share in Explorer Value at last report, by the way—had determined the change would be in the best interests of shareholders. Gobbledygook. Wasn’t the original decision to put three management teams on the fund, made when the fund was launched a bit over six years ago in March 2010, in the best interests of shareholders?

Sterling’s Small Value Picks Lagged

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Rising line = ETF outperforms Explorer Value Sterling Small Cap Value

Sterling Capital Mid Value A Sterling Mid-Cap Value SmallCap Value Index

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So, the question remains: Was it something about Sterling’s investment staff, its investment process or its performance? Vanguard won’t say, though they offered that all three were factors it evaluates. Jeff did some digging and couldn’t find any evidence that the company has been roiled by personnel problems, and it’s unlikely that their process somehow changed all of a sudden. But it could be that Sterling was the weak hand among the three management teams on the performance front. Sterling’s portion of Explorer Value was measured, for performance bonus purposes, against the Russell 2500 Value index of about 1,670 small-cap/mid-cap stocks. That means Sterling’s combined mid-cap and small-cap stock picks were their grist for Explorer Value’s portfolio, though the emphasis was probably upon the smaller stocks it chose. Analyzing the performance of separate portfolios run by Sterling’s team members, Jeff found that while performance of their mid-cap value strategies was fairly close to that of Explorer Value’s overall, their small-cap value strategies were pretty poor, posting results that lagged Explorer Value’s by 3.0% per annum and lagged SmallCap Value Index by 2.6% per annum. Did Vanguard fire Sterling Capital Management for performance problems? They’ll never tell, but as I said at the outset, the fact that they’ve trimmed Explorer Value’s management teams by one-third puts a big question mark over Vanguard’s claim that more is better when it comes to portfolio management teams. And it may be a sign of better things to come for Explorer Value.

The Independent Adviser for Vanguard Investors • July 2016 • 15

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