(PUB) Investing 2016

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ager is accountable for his own deci- sions. The end result of this approach is a high-conviction portfolio with 131 stocks and over 40% of the assets in its 10 largest holdings. While the long-term track record is impressive, keep in mind that the fund does not beat the market month in and month out. In fact, since the fund’s incep- tion, it has only outperformed 500 Index 56% of the time. But it’s those periods of outperformance that have created such a stunning long-term track record. PRIMECAP remains closed to new investors, but its near-clone, PRIME- CAP Odyssey Growth (POGRX), is wide open. Because of its smaller size, it’s nimbler, and it has substantially outperformed its granddaddy since its introduction in November 2004. Through August 2016, the new fund is up 225.7% versus 206.2% for gramps. The Odyssey funds are available through Vanguard’s brokerage ser- vice, and as I have long recommended, unless the taxes you’ll pay selling your Vanguard holdings are a concern, you have no excuse for sticking with the original, which is still great, but not as great . At a minimum, I’d take any dis- tributions from PRIMECAP and invest them in the Odyssey fund. PRIMECAP Core Buy. The youngest PRIMECAP Management-run fund at Vanguard has been closed to new investors longer than it was ever open to all comers. Too bad. This slightly less growthy version of PRIMECAP has a lot going for it. In fact, it’s the only PRIMECAP-run fund at Vanguard that’s outperformed its Odyssey sibling, mainly because it has a lower expense ratio and both funds are nearly identical, having been birthed at virtually the same time. The expense difference is key. Since their December 2004 inceptions through August 2016, PRIMECAP Core outper- formed Odyssey Stock (POSKX) by a narrow margin, 189.6% versus 182.0% With about 150 stocks, and one-third of its assets among its 10 largest hold- ings, this fund has all the hallmarks of a typical PRIMECAP Management offering. Though, as the name implies,

thinking and patience combined with a distinct approach to picking stocks and managing a fund is how. The PRIMECAP Management team’s approach can be simplistically called growth-at-a-reasonable-price, or GARP. The managers look for companies with the potential for strong earnings growth, but which are currently selling for less than comparable growth companies are— most likely because there’s some negative factor influencing most investors’ percep- tion of the company’s value. Because they are buying stocks facing near-term uncertainty, it often takes time for their ideas to work out. But in contrast to many other growth managers, the PRIMECAP team is willing to wait, and on average holds onto a stock for a decade. Also in contrast to other growth managers, there is no single star man- ager here. The PRIMECAP team eschews the limelight. Each of its five managers is responsible for managing a slice of the fund. If two managers own the same stock, it will result in a larger position in the portfolio, but each man-

Morgan Growth’s low expenses make it an able competitor in the broad mutual fund universe, as is the case with most of Vanguard’s multimanager funds, but that doesn’t mean the fund is deserving of your money. Over the past nearly 30 years, Morgan Growthmay have matched the Russell 3000 Growth index, but it has lagged steadily over the past decade. Even former Vanguard Chairman Jack Bogle said years ago that Morgan Growth is “an average fund. It’s not a star.” If I’m not buying a star, why con- tinue to pay active management fees if you are just going to receive index-like or worse performance? PRIMECAP Buy. Let’s make it simple. A dollar invested in 500 Index at the end of 1984 when this fund was launched would be worth $26.12 today. A dollar invested in Morgan Growth and one in U.S. Growth over that same period would be worth $23.60 and $13.91, respectively, today. A dollar in PRIMECAP? $54.06! How do they do it? Independent >

Growth Index Funds

S&P 500 Growth ETF

Russell 1000 Growth ETF

MegaCap Growth Index

Growth Index

8/31/16

Number of Stocks

330 27.3

316 24.3

605 24.8

144 26.2

P/E

P/Book

4.8

4.9

5.7

5.0

Median Market Cap.

$70.3

$88.9 0.15%

$70.3 0.12%

$95.8 0.09%

Expense Ratio

0.22% / 0.08%*

Sector Allocations Consumer Services Consumer Goods

21.2% 11.3% 3.1% 12.5% 14.8% 11.4% 24.3% 1.0% 0.4% 0.0% 27% Apple

17.3% 9.8% 1.6% 8.2% 17.2% 9.1% 33.2% 2.4% 0.9% 0.3% 30% Apple

22.3% 9.1% 0.6% 9.8% 16.7% 11.1% 25.1% 4.1% 1.2% 26% Apple —

22.8% 11.5% 3.0% 11.2% 15.1% 9.0% 25.6% 1.7% 0.1% 0.0% 33% Apple

Oil & Gas Financials Health Care Industrials Technology

Basic Materials

Telecom Utilities Top-10

1 2 3 4 5 6 7 8 9

Alphabet

Alphabet Microsoft

Alphabet

Amazon.com Facebook Coca-Cola Home Depot

Amazon.com

Facebook

Home Depot

Comcast Johnson & Johnson

Visa

Comcast

Philip Morris Int’l

General Electric

Walt Disney Philip Morris Int’l

Visa

Comcast

Visa

10 Walt Disney *Investor shares and ETF shares. Admiral shares are also 0.08%. Note, Vanguard’s Russell and CRSP indexes use different definitions for the “sectors” their indexes are allocated to, so comparisons are approximate. Walt Disney Walt Disney Pepsi

6 • Fund Family Shareholder Association

www.adviseronline.com

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