(PUB) Vanguard Advisor

History says it could, but that would only make 2014 a normal year for small-cap stocks. Is Bigger Better? With investors’ recent turn to larg- er fare, you may be wondering how large-caps compare on this score. The second graph on the right plots the same exercise for 500 Index, which has averaged a 14.8% drawdown over the same 24-year period. But, again, despite the inevitable declines, stocks have delivered positive returns far more often than not. With an average calendar year return of 11.0%, 500 Index has notched positive returns in 19 of 24 years. How does an active manager com- pare? Looking back at PRIMECAP over the past 24 years, the average intra-year decline of 16.3% was actu- ally a touch steeper than 500 Index’s. But, once again, investors have been

Large Stocks Take Hits, Too

A (Near) Bear Market Every Year in Small Stocks

Calendar-Year Returns Intra-Year Declines

Avg. Calendar-Year Return Avg. Intra-Year Decline

Calendar-Year Returns Intra-Year Declines

Avg. Calendar-Year Return Avg. Intra-Year Decline

60%

60%

40%

40%

20%

20%

0%

0%

-20%

-20%

-40%

-40%

-60%

-60%

12/91

12/93

12/95

12/97

12/99

12/01

12/03

12/05

12/07

12/09

12/11

12/13

12/91

12/93

12/95

12/97

12/99

12/01

12/03

12/05

12/07

12/09

12/11

12/13

well rewarded for sticking through drawdowns as PRIMECAP gained ground in 19 of the 24 calendar years with an average return of 14.7%— better than 500 Index or SmallCap Index! As investors, acknowledging that declines are a normal part of being in the markets better prepares us to stay the

course when the next correction arrives. Our holdings in funds like Capital Opportunity or Selected Value , which hold a smattering of smaller stocks, or large-cap funds like Dividend Growth may be buffeted by the vagaries of the day-to-day markets, but they remain some of Vanguard’s best funds. Stick with them. n

to be that the West was screwed; it was all about emerging markets—it is now a bit more balanced. We see opportunities all around the world.

disappointed for 40 years. So we didn’t buy our Indian bank share for a six- or 12-month view. We bought it to be there for the next 10 years.

You were sounding a pretty bullish note on the emerging markets two years ago, but not so much today. For at least two years we tended to be net sellers in places like Brazil and South Africa. The West has been doing better than we thought, and there’s a broader range of opportunities now, so we wanted to broaden the portfolio. At the moment we are window shopping in EM. We are looking for the next generation of emerging market opportunities. We are not yet at the point where we are prepared to put more money to work, but we are monitoring very closely. We are actually quite excited about Africa. It’s driven by things like mobile payments and mobility and smart phones and so on. Africa doesn’t have the infrastructure, but it does have internet connections and wireless connections. We are not yet invested, but we are going on trips, and we are searching. Last year, you made your first trip to India and came away with an upbeat outlook on the country’s prospects. How has that been expressed in the portfolio? We’ve got about 1% of the portfolio invested in India now. We came back—last autumn, actually in a period where the market was panicking about India, we bought ICICI Bank, which is one of the two largest private sector banks in India. It gives us a generic exposure to an economy that we think is at an attractive point in its cycle. The recent election promises big change if the new president can do for the country what he did in his state. That is absolutely right. Here is someone who can actually make things—you know, there is so much skepticism in India because it has

Even though yields in peripheral Europe are back in line with other developed countries and there are signs of economic growth, the European Central Bank (ECB) may ease further. Is it necessary? We invest in companies, not the ECB. Many of the world’s best busi- nesses are based in Europe. We don’t have significant exposure to the domestic European economy. Our stocks tend to be global companies. So we have relatively little exposure to European demand. Whether monetary policy is getting a bit looser or a bit tighter, the fact is that Europe is going to grow more slowly than much of the rest of the world because it has structural problems, in addition to financial, you know, debt issues. We’ve got demographic issues. We’ve got political issues. So Europe is going to be a relatively slow-lane region. At the very, very margin, we did buy a small investment in the Bank of Ireland about a year ago as a sort of geared exposure to fringe Europe. So far that has been a very pleasant experience. We don’t spend any time considering what the ECB will or won’t do—or indeed the Fed, even in the U.S.—that’s not what we are looking at. We are trying to take a big view. For any individual company, is the operating environment going to remain satisfactory or is it going to get better? As long as we can say yes, then we will consider investing in it. Do you invest in the Global strategy? Yes. For all three of the fund managers on this team, Global Alpha is our single largest financial asset.

Thank you, Charles. Note: A longer version of this Interview appears at www.adviseronline.com.

The Independent Adviser for Vanguard Investors • June 2014 • 7

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