(PUB) Investing 2016

counts on existing inventory to speed sales. These discounts allow corporate purchasers looking for proven technolo- gy to buy the cheap, well-tested products still sitting on manufacturers’ shelves. The net effect is that technology com- panies begin to see increased demand, and tech stocks rally in advance of earn- ings news. Tech Winter draws to a close after the start of the new year, when technology companies restock their inventories and a new purchasing cycle commences. As this happens, tech stocks don’t necessarily underperform the stock market as a whole, but they do become less predictable in their movements, not following the pattern commonly seen between November and February. As you know, Vanguard’s only tech funds are Information Technology Index and its ETF sibling. But over at Fidelity, where active managers run a

As the calendar draws closer and closer to year-end, there may be unspent money that needs to be used. Why? Because the tech managers know that next year, come budget allocation time, if they have something left over from the previous year, they’re likely to see those budgets cut. They don’t want that, so they spend liberally in the year’s final months, upgrading a server here or an office full of smartphones there. Also, this year in particular, the presidential campaign has made many companies nervous, and spending may have been dialed back a bit until after November 8, though in all honesty, over the past several election cycles there is no dis- cernible pattern for Tech Winter under- performance or outperformance. Finally, corporate spending also has tax implications for companies that want to cut down on what they owe the government. Whatever the rationale, this spending surge, referred to by its practitioners as a “budget flush,” is often noticed in the markets. And the tech stocks that are expected to ben- efit from this seasonal year-end spend- ing begin rising on expectations of increased earnings in the coming year. Whether, in fact, this flush will occur is always a question mark. And by the time the question has been answered, stock prices usually already reflect that—so you want a manager who knows how to get ahead of that move on your team. A second and wholly separate factor is Europe. European purchasers have in the past accounted for a significant per- centage of U.S. technology orders. It’s typically the fourth quarter when they do a lot of buying. In most years, this occurs because of the longer summer vacations European companies give their work- ers, during which time orders slack off. When workers return, orders begin rising in the fall and through the winter, often hitting a peak in the last few months of the year. Now, given that the EU appears to be on the mend, the European factor could play a bigger part in a tech spurt. However, let’s add in one more cata- lyst that has typically helped tech stocks late in the year: Discounting. Hardware companies, beginning to retool for new product launches, start offering dis-

Fidelity Tech Fund Dominance (Average November to February Returns for 30 Years)

14%

12%

10%

8%

6%

4%

2%

0%

Electronics Technology Software Computers

500

& ITSvcs.

Index

host of tech-oriented funds, the evi- dence that a smart tech investor can do well during the four months of Tech Winter is pretty compelling. Take a look at the chart above showing the aver- age four-month returns for a number of tech-related Fidelity funds. (Jim >

EXPECTATIONS Law of Small Numbers

I’M GOING TO CALL THIS the “law of small numbers” because, indeed, when yields get tiny, some funny things begin to happen. Take Ultra-Short-Term Bond , one of the newest of Vanguard’s bond funds, which I think of as a money market alternative, even though Vanguard says it isn’t. The fund’s maturity is ultra-short, as the name implies, and comes in two flavors, the Investor shares, with a $3,000 minimum and a 0.20% expense ratio, and the Admiral shares, for which you need $50,000 to gain access to a cheaper 0.12% expense ratio. Now, when you’re talking about ultra-short bond funds, I’m sure you realize that every penny, and even every fraction of a penny, counts. Saving 8 basis points on your expense ratio should mean you earn more money, right? Indeed, over the year ending in September, Admiral inves- tors did a bit better than that, with a total return of 1.16% versus 1.01%, which means they actually earned 15 basis points more. But the route to this advantage is a rocky one. On a monthly basis, the Admiral shares out- perform the Investor shares only 58% of the time. Yup, there was even one month early in the fund’s life when the Investor shares showed a positive return while the Admiral shares posted a loss. How could that be? Pennies. Because the Investor shares began life at a $10 net asset value while the Admiral shares started at $20, the Admiral shares have more increments in which to move up and down on a daily basis. Through the end of October, there have been 166 days when the Investor shares showed no change in price, but there’ve only been 145 days when the Admiral shares didn’t move. And, depending on whether they moved or didn’t at month-end, when performance is tal- lied and interest is reinvested, well, it’s the law of small numbers. I think Ultra-Short-Term Bond is a great money fund alternative, with a fully taxable SEC yield of 1.02%, which is 41 basis points higher than, say, Prime Money Market ’s. But under- stand that if you take a short-term view, you may not always like what you see when you buy the Admiral shares. And frankly, you may still be better off using a tax-exempt money fund. At month’s end, the taxable-equivalent yield on Tax-Exempt Money Market came to 0.99%. Not bad for a fund with absolutely no movement in its price.

The Independent Adviser for Vanguard Investors • November 2016 • 15

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