(PUB) Investing 2016

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 regula- tions. But how it’s being executed may ultimately be International Explorer’s downfall. Schroder Investment Management’s team, led by Matthew Dobbs in London, can take credit for the fund’s early success. (This is the same Schroders that oversees a portion of International Growth.) However, after a fantastic run as a tiny fund, Schroders’ performance turned lackluster. The fund has per- formed relatively better since the addi- tion of Wellington Management’s Simon Thomas, but overall, since Vanguard “adopted” it 14 years ago, it hasn’t been able to outpace its benchmark. International Explorer, whose 2015 performance earned it the Hot Hands designation for 2016, has had its good periods and its bad ones. I am not con- vinced it’s best for our portfolios. If you own it, okay. But I am not pounding the table to buy it. International Growth Buy. This good fund just got a whole lot better. As Dan notes on page 4, Vanguard trimmed International Growth’s manager ranks from three to two by firing M&G Investment Management last month. M&G only ran 12% or so of the fund, so this isn’t a drastic overhaul, but it helps. With the change, Baillie Gifford will manage 60% of the assets, and Schroders will run 40%. International Growth was one of the multimanaged funds that actually worked, with a reasonably compact portfolio and index-beating returns over long periods of time. That said, I think this is a change for the better. Keep in mind, though, this doesn’t mean the fund will outpace Total International Stock Index month after month. In fact, over the three and a half years between when Baillie Gifford’s weight in the fund stabilized at around 50% and the end of June, International Growth has only outpaced the index fund in 20 of 42 months. But its out-

through the end of March 2016 (the most recent data I found for the sub-advisers), Global Equity returned 135.3%. Marathon’s separate account was up 205.6%—meaning the fund still hasn’t performed as well in its new form as it would have under sole manage- ment by Marathon. Baillie Gifford’s separate account gained a respectable 173.1%. And as I said, Acadian’s indi- vidual record brings up the rear with a 114.9% gain. A global fund can make a great core holding for those with smaller portfo- lios who are looking for exposure to foreign stocks. But given that just over half the portfolio is made up of over- seas stocks, you’ll have to temper it with at least one or two domestic funds to avoid excessive foreign exposure. One thing is clear, though: Active man- agement has won the day here. Global Minimum Volatility Buy. Out of the gate, Global Minimum Volatility has put up terrific numbers when compared to its glob- al counterparts. Granted, the fund has only been open since mid-December 2013, so it’s only just approaching its third anniversary, but Vanguard’s ver- sion of risk aversion has worked over the past few years. Since inception, the fund’s 34.9% gain is tops among all of Vanguard’s diversified stock funds— foreign or domestic. It’s better than Total Stock Market ’s 26.7% gain, as well as Total International Stock Index’s 0.2% decline. Score one for Vanguard’s active management team. If I had to summarize what’s made this fund work so far, it’s that it has done better versus its peers in down markets than in up markets. Over the first 31 full months it has been in busi- ness, there have been 14 months when Total World Stock Index declined. During those months, Global Minimum Volatility outperformed the index fund by an average 1.9%. In the other 17 months, when Total World Stock Index was up, the index fund’s outperfor- mance averaged just 0.5%. In fact, Global Minimum Volatility outper- formed the index fund in up months about half the time. That’s impressive. >

Global Equity vs. Total World Stock Index

0.70 0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50

Rising line = Global Equity outperforms

AllianceBernstein fired

Acadian Asset Management joins Marathon on fund ▼

▼

Alliance Bernstein hired (third manager)

▼

Baillie Gifford hired (fourth manager) ▼

6/96

6/98

6/00

6/02

6/04

6/06

6/08

6/10

6/12

6/14

6/16

What’s going on here? Well, the fund’s objective is to have broad, global stock exposure exhibiting lower volatil- ity than the overall market while build- ing a portfolio that doesn’t differ in its industry exposures from the bench- mark. In addition, the fund’s manag- ers attempt to minimize or eliminate currency risk. This means the fund has had twin tailwinds at its back: Low volatility stocks have been in vogue, and the dollar’s strong climb of nearly 20% against a basket of currencies means currency hedging has contrib- uted mightily to performance. With less than three years under its belt, Global Minimum Volatility already has over $500 million in assets. The fund has merit, and even more so as long as the dollar remains strong. But I wouldn’t expect that top-of-the-tables performance to con- tinue uninterrupted. Once the currency tailwind becomes a headwind, outper- formance may fade. Additionally, at some point, lower volatility stocks will fall out of favor with investors. This fund has definitely earned its Buy rat- ing, but you may need to temper your expectations. International Explorer Hold. As I’ve said many times, this fund faces stiff competition from its passive cousin, World ex-U.S. SmallCap Index . International Explorer , like the index fund, is focused on small-cap for- eign stocks. In my mind, that long-term objective should favor active manage- ment, since separating the wheat from

14 • Fund Family Shareholder Association

www.adviseronline.com