(PUB) Investing 2016

performance 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 Management (hired in 2012), a third to Lazard (on board since 2006), and almost 40% to Edinburgh Partners (who’ve been here since 2008). Like International Growth, while the fund’s month-to-month outperformance or underperformance relative to Total International Stock Index is all over the map, International Value has outpaced the index over the long run, as you can see in the chart to the right. It appeared that Vanguard had final- ly gotten the manager mix right, but over the past few years, International Value has slipped relative to Total International Stock and International Growth. The current team may yield a payoff down the road, but I’d rath- er stick with the leaner International Growth. Pacific Index Hold. Like European Index, Pacific Index recently picked up a new bench- mark, the FTSE Developed Asia Pacific All Cap Index, bulking out the portfolio with many small-cap stocks that it’s never held before. Japan remains a huge component of this fund’s bogey, with close to 60% of its holdings there. Australia is the next biggest source of stocks, and then Korea, Hong Kong, Singapore and a smattering of Kiwi stocks make up the remainder. As I noted earlier, I’ve never been a big fan of Vanguard’s regional foreign funds, because active managers have shown they can outrun the indexes pretty darned consistently. What do buyers of foreign index funds like Pacific Index know about Japan and

I’d opt for the managed fund if I wanted a global stock portfolio. This fund and its ETF shares (VT) provide Vanguard with its only global equities index option, which fills out the company’s product line. If you are an efficient-market adherent, this would be the index option for you, except for one problem: You could replicate this fund at a lower cost by buying Total Stock Market Index and Total International Stock Index. Some might prefer to have a single holding for simplicity’s sake, but I’d rather save a few extra pennies than a few extra clicks. Historically, risk was much greater here than at Global Equity. During the 2000–2002 bear market, Global Equity’s maximum loss reached 23.3%. The FTSE All-World index dropped almost twice as much—a stunning 44.7% decline. However, during the 2008–2009 tumult, the tables were turned—another reason to always keep one skeptical eye open. World ex-U.S. Index Sell. Looking for a way to put up a competitive foreign equity exchange- traded fund (ETF), Vanguard hit on the idea of starting this fund to track the FTSE All-World ex-U.S. index in 2007. At the time of its launch, an allocation to Canada distinguished this fund from Total International Stock Index. Now, however, the two funds have very simi- lar country and region allocations, not to mention top 10 holdings. With “only” 2,400 or so holdings, this fund has a more compact portfolio compared to Total International Stock Index’s 5,700-plus stocks. However, the two funds have performed almost identically since the latter’s 2010 over- haul. As mentioned above, World ex- U.S. Index is the more expensive option of the two: Operating expenses run 0.26% versus 0.19%. At this point, other than holding onto this fund for tax reasons if you already own it, there isn’t much of an argument for buying it.

Active Management Outperforms

0.85 0.90 0.95 1.00 1.05 1.10 1.15 1.20 1.25 1.30 1.35

Rising line = Active fund outperforms

International Growth vs. Total Int’l International Value vs. Total Int’l

6/96

6/98

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the Pacific Rim that the managers don’t? I’d rather let the managers decide how much to invest and in which countries. Total International Stock Index Hold. Anyone who chooses an index fund over a managed fund in foreign markets is simply not using their head. Either that, or they just haven’t looked at the numbers, which show that most of Vanguard’s actively managed funds have outperformed this index fund over time. Formerly an EAFE plus emerging markets index fund, in the fall of 2010, Vanguard switched the fund’s bogey to the MSCI All Country World ex- USA Investable Market Index. The big change was that the fund suddenly had portfolio exposure to Canada—making it nearly indistinguishable from World ex-U.S. Index. The move to the FTSE Global All Cap ex-U.S. Index in 2013 was, by comparison, a non-event. If you are looking to separate out your U.S. and foreign index holdings, this is my preferred foreign-only index fund, as it now includes emerging mar- kets and Canada, is cheaper than World ex-U.S. Index (0.19% vs. 0.26%) and holds more stocks than World ex-U.S. Index (which doesn’t dip down into the small-cap space). That said, I’m a bigger fan of the managed options, par- ticularly International Growth. Total World Stock Index Hold. For a while this fund was giv- ing Global Equity a run for its share- holders’ money, as noted earlier. Today,

World ex-U.S. SmallCap Index Hold. This fund has at times

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The Independent Adviser for Vanguard Investors • August 2016 • 15

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