(PUB) Investing 2016

15

February 2016

Morningstar FundInvestor

CII and CWI managers communicate within their respective teams and with their respective analyst groups, but they don’t share investment ideas across subsidiaries. That makes for a more diverse fund, as does the firm’s practice of having each manager run a separate sleeve of the portfolio. Robert Lovelace, the longest-tenured manager, oversees CII ’s side and the fund as a whole, while Joanna Jonsson oversees CWI ’s side. Although Lovelace and Jonsson don’t share investment ideas, they talk regularly to ensure that balance and diversification characterize each side’s respective subportfolios and the entire fund. Over the years, the fund has amassed an impressive record. Through the end of 2015 , its three- and five-year rankings were in the 12 th percentile of the world-stock Morningstar Category, and its 10 -year return landed in the fourth percentile. The fund also comfortably topped the returns of the relevant indexes in those stretches. What’s more, its Morningstar Risk rating was below average (indi- cating that it had milder-than-average volatility) for all three periods. That’s a powerful combination. U.S. Fixed-Income Fund Manager of the Year Jerome Schneider PIMCO Short-Term PTSHX It is unusual to see a manager nominated for the performance of a fund in the ultrashort-bond Morningstar Category, a relatively conservative group typically run with durations of less than a year. However, in a year when short-term rates rose sharply and many bond funds failed to earn a positive return, Jerome Schneider’s performance at PIMCO Short-Term stands out. This fund earned a 1 . 37% return in 2015 , placing it in the top 1% of the ultra- short-term bond category. The fund’s returns also compare strongly with the short-term bond category norm, where portfolio durations range between roughly 1 . 0 and 3 . 5 years. Schneider actively adjusted the fund’s curve positioning and rate sensitivity over the course of the year, which contributed a healthy portion of its returns. Schneider maintained a very short duration for the first half of the year, even briefly taking duration into slightly negative territory in January and February. He then lengthened duration

modestly later in the year, generally avoiding issues in the ultrashort reaches of the curve, sensitive to chan- ging expectations surrounding Federal Reserve policy. U.S. Allocation Fund Manager of the Year Michael Reckmeyer and John Keogh Vanguard Wellesley Income VWINX Stability has been the key to this fund’s success. Unlike many conservative-allocation peers, it doesn’t make tactical shifts between stocks and bonds. Michael Reckmeyer invests between 35% and 40% of the fund’s assets in equities that pay above- average dividends, which he tries to buy when they are out of favor. Meanwhile, John Keogh tilts the remaining 60% – 65% bond portion toward corporates rated in the A range, and he eschews big interest- rate bets. The duo uses the market’s fluctuations to rebalance the fund’s mix of stocks and bonds and relies primarily on security selection to come out ahead. The fund boasts a superior longer- term record. Since the shared tenure of fixed-income manager Keogh and equity manager Reckmeyer began in July 2008 , the fund’s 7% annualized gain through December 2015 places second out of about 140 peers, while its Morningstar Risk-Adjusted Return places first. U.S. Alternatives Fund Manager of the Year James Troyer, Michael Roach, and James Stetler Vanguard Market Neutral VMNIX This team was also nominated in 2014 . Simply put, Vanguard Market Neutral has produced what investors want from alternative strategies: very low correlation, solid returns when equity markets go south, and, on top of that, the lowest fees of any alter- natives fund. The three managers are all long-tenured members of Vanguard’s quantitative-equity group; James Troyer has been a named manager on the fund since 2007 , while Michael Roach and James Stetler were added in 2012 . Vanguard has been the sole man- ager of the fund since October 2010 , when it dropped AXA Rosenberg as a subadvisor. From that point, the fund’s 4 . 2% annualized return and 0 . 95 Sharpe ratio are the best in the market-neutral category through December 2015 . The lowest minimum investment is a steep $250 , 000 , as Vanguard wants investors to go through financial planners to get to the fund. K