Home Adviser Fund Update Vanguard’s Manager Rotation Published March 15, 2013 Vanguard’s Manager Rotation At the end of February, Vanguard announced that it was making a number of leadership and manager changes in an effort to rotate talent and strengthen its team. As part of that rotation, quite a few index funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. and annuitiesA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). were appointed new managers or co-managers while the EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Index, BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. Index and Active Equity Groups all have new heads. Here is a brief rundown of the new leadership appointments: Joseph Brennan, who had been heading Vanguard’s Asia Pacific branch from Australia since 2009, has returned to the U.S. to take over the Equity Index Group, which oversees all of the firm’s domestic and international equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. index funds and annuities. Gregory Davis, former head of the Bond Index Group, has filled Brennan’s role in the Southern hemisphere. Joshua Barrickman is the new head of the Bond Index Group. Barrickman has been a bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. manager with Vanguard for the last decade and will continue to manage or co-manage a handful of bond portfolios. John Ameriks, Ph.D., is the new chief of the Active Equity Group, which is responsible for all of the funds (and portions of funds) that Vanguard actively manages. Ameriks has been with Vanguard since 2003 and was the head of the Investment Counseling & Research Group for the last five years. Ameriks will fill part of the role vacated by Sandip Bhagat, the former head of the Equity Investment Group, who resigned at the end of 2012 after Tim Buckley took over as chief investment officer. The table below shows the manager changes that have gone into effect as a result of the rotation. With index funds, the manager often takes secondary importance to the underlying benchmark and objective, but he or she can add an element of riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. with something called “sampling error.” For funds that track larger indexes where it is impossible or inefficient to own every component, the manager is responsible for choosing representative holdings from the index to build a portfolio that closely matches its performance. When this process is not successful, the fund’s performance can significantly diverge from the index’s. Fortunately, with Vanguard, sampling error is a very rare occurrence (most recently seen in several of the bond indexes nearly a decade ago) and it is not uncommon for the managers to lag their benchmarks’ performance (which do not have expenses or fees) by less than the fund’s operating expenses, a notable feat. Manager Musical Chairs Equity Funds Old Manager(s) New Manager(s) Admiral Tax-Managed International Donald Butler Christine Franquin Balanced Index Michael Perre (stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. portion), Gregory Davis (bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates.) Christine Franquin (stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company.), Joshua Barrickman, Paul Malloy (bonds) Conservative Allocation AnnuityA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). Duane Kelly Michael Buek, William Coleman, Walter Nejman Diversified Equity Duane Kelly Michael Buek, William Coleman, Walter Nejman Global ex-U.S. Real Estate Index Gerard O’Reilly Michael Eyre MidCap Growth Index Gerard O’Reilly Donald Butler Moderate Allocation Annuity Duane Kelly Michael Buek, William Coleman, Walter Nejman S&P 500 Growth ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. Ryan Ludt Michael Johnson S&P 500 Value ETF Ryan Ludt Michael Johnson S&P MidCap 400 ETF Donald Butler Christine Franquin S&P MidCap 400 Growth ETF Donald Butler Christine Franquin S&P MidCap 400 Value ETF Donald Butler Christine Franquin S&P SmallCap 600 ETF Michael Buek Andrew Maack S&P SmallCap 600 Growth ETF Michael Perre Andrew Maack S&P SmallCap 600 Value ETF Michael Buek Andrew Maack STAR Duane Kelly Michael Buek, William Coleman, Walter Nejman Target Retirement funds Duane Kelly Michael Buek, William Coleman, Walter Nejman Total StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Market Annuity Duane Kelly Michael Buek, William Coleman, Walter Nejman Total World Stock Index Ryan Ludt Christine Franquin World ex-U.S. SmallCap Index Ryan Ludt Michael Eyre Bond Funds Old Manager(s) New Manager(s) Extended Duration Treasury ETF Gregory Davis Joshua Barrickman, William Baird Intermediate-Term Corporate ETF Joshua Barrickman Joshua Barrickman, Paul Malloy Intermediate-Term Government ETF Gregory Davis Joshua Barrickman Long-Term Bond Index Gregory Davis Joshua Barrickman, Paul Malloy Long-Term Corporate ETF Joshua Barrickman Joshua Barrickman, Paul Malloy Long-Term Government ETF Gregory Davis Joshua Barrickman Mortgage-Backed Securities ETF Gregory Davis, William Baird Joshua Barrickman, William Baird Short-Term Bond Index Gregory Davis Joshua Barrickman, Yan Pu Short-Term Corporate ETF Joshua Barrickman Joshua Barrickman, Paul Malloy Short-Term Government ETF Gregory Davis Joshua Barrickman Total Bond Market Annuity Gregory Davis, William Baird Joshua Barrickman, William Baird Total Bond Market Index Kenneth Volpert, Gregory Davis Kenneth Volpert, Joshua Barrickman It’s unlikely that investors will notice any changes in the funds with new managers or that there will be any observable differences in how Vanguard operates overall. However, the three fund group managers do have a part in new fund development, so it will be interesting to see what, if any, new investments are eventually brought to market. That said, apart from sporadic spurts of activity, Vanguard has been slow in recent years to open new funds, usually introducing just a couple per year. About Adviser Investments Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. 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