(PUB) Investing 2016

PERFORMANCE Distorting MidCap Growth’s Gains

Counsel in 1997 and was adopted by Vanguard in July 2002. At the time, the managers had crushed the returns of the Russell MidCap Growth Index— MidCap Growth’s benchmark—rising 47.4% to the index’s 8.9% loss. But Provident was getting no traction in the marketplace, and the fund’s assets stood at a paltry $31 million at the time the adoption was proposed. (On a side note, Vanguard also adopted the fund that is now International Explorer , which was even smaller, at the same time.) In the relative performance chart to the right, you can see the stunning outperformance of the fund in its first two years relative to the Russell bench- mark. You can also see that relative

HERE THEY GO AGAIN. In a July 1 posting to its website, Vanguard brags about the “since inception” mar- ket-beating performance of MidCap Growth , a multimanaged fund run by Chartwell Investment Partners and WilliamBlair Investment Management. As Vanguard writes, “the fund has beaten its benchmark by more than 2 percentage points since its December 31, 1997, inception…” There’s just one problem: The mul- timanagement duo, which has been running the fund since June 2006, has underperformed its benchmark. How is this possible? MidCap Growth is aVanguard adoptee. The fund, originally named Provident MidCap, was started by Provident Investment

MidCap Growth vs. Russell MidCap Growth Index

0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80

Rising line = Fund outperforms

Adds Chartwell as co-manager

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Vanguard “adopts” fund and renames it MidCap Growth ▼

Fires original manager, ▼

Provident, and hires William Blair to split fund with Chartwell

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performance began to go south just after Vanguard adopted the fund, and, as of the end of June 2016, the fund has underperformed dramatically. Vanguard continues to try and make it appear as though their multimanage- ment strategy on individual mutual funds is a winner. At least when it comes to MidCap Growth (and sev- eral other funds, like Explorer and Morgan Growth ), it’s been anything but. n

As It Grows, MidCap Growth Slows Annualized Performance since:

Russell MidCap Growth Index

MidCap Growth

Fund Inception (Dec. 1997) Vanguard Adoption (June 2002) Current Dual Managers (June 2006)

9.5% 8.8% 7.8%

7.4% 9.8% 8.1%

Note: Returns through June 2016.

MYTHS Recessions and Bonds—Bears Have It Wrong

yields between long and short maturity bonds rises, we say that the yield curve is steepening. Conversely, the yield curve is flattening when that spread shrinks. Why do we care about the yield curve? Well, some investors, econo- mists and market strategists use the yield curve as a sign of the health of our economy. It helps to think about the basic means by which a bank makes money. In simple terms, a bank “borrows” money in the form of deposits and pays savers interest at short-term rates (which, as we know all too well, have been next to nothing for years). The

In fact, rather than a bearish tale, the actual, objective story here is a bullish one. Let’s start at the beginning with the yield curve. The first graph on page 7 shows today’s yield curve, which maps the current yields of Treasury bills, bonds and notes with maturities rang- ing from three months out to 30 years. Generally, the yield curve slopes up to the right as investors demand more income (or yield) as they lend money for longer. But the shape of the yield curve changes, because bond yields don’t all rise and fall by the exact same amount at the exact same time. When the difference (or spread) in

BOND MARKET PUNDITS are raising the “R” word again. That’s “R” for “recession.” Their current bugbear: The shape of the Treasury yield curve and, in particu- lar, the difference between 10-year and 2-year Treasury rates. I know discussing the bond market and the yield curve (a) causes eyes to glaze over and (b) often feels a little in the weeds, but stick with me here. The current worry about the yield curve is a great example of pundits framing the data to tell the story they want (and in the pro- cess scaring investors and driving clicks on their websites) rather than looking at the data and then coming to a conclusion.

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