We may be in the dog days of summer but there’s no slowing down the Malvern, PA mutual fund colossus. Here’s what’s been keeping Vanguard busy while you’ve been at the beach.
New Active Fund Announced—International Core StockA financial instrument giving the holder a proportion of the ownership and earnings of a company.
Wellington Management—the venerable sub-adviser behind several of Vanguard’s standout active funds—has tapped one of its best small-cap growth investors for a new international stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. fund.
In a press release and Securities and Exchange Commission (SEC) filing last month, Vanguard announced that Ken Abrams, a lead manager of the multi-managed Explorer fund, will be a co-manager of the firm’s new International Core Stock fund. Abrams will run the fund along with Halsey Morris, a global industry analyst at Wellington who recently relocated to Boston from a stint in London.
International Core Stock will have a portfolio of between 60 and 100 non-U.S. stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. chosen from what Vanguard is calling an “opportunity set” of 350 to 400 companies. The fund will be benchmarked against the MSCI ACWI ex USA Index, the former benchmark for Vanguard’s Total International Stock Index fund. Costs will run 0.45% for Investor shares and 0.35% for Admiral shares.
International Core Stock is expected to hit the market sometime in the fourth quarter of 2019.
Given Abrams’ long track record managing portfolios, it wouldn’t surprise us if he’s been asked to mentor the 40-year-old Morris, giving him hands-on guidance on constructing and running a fund. As Abrams gears up for International Core Stock’s opening, he’ll be handing off more and more responsibility to Daniel Fitzpatrick, his 45-year-old co-manager on Wellington’s portion of the Explorer portfolio; Vanguard has announced he will have transitioned off of Explorer by year-end 2019.
The new International Core Stock fund is a way to tap the “multi-managers” at Wellington through their global industry analysts, all of whom will be contributing ideas, with Abrams and Morris curating them. And Abrams, who has been a named portfolio manager on Explorer since 1994, is 59 years old, so it doesn’t appear that he’s going to retire at 60 like several of his colleagues have in recent years.
We’ll be keeping a close eye on how this new foreign-focused fund stacks up against some of our favorites once it’s open to investors.
While foreign stocks have lagged U.S. stocks over the bull marketA period during which stock prices rise significantly from recent lows for weeks, months or years. of the last 10 years, market leadership can and will shift over time. That’s why we think investors are best served by diversifying their portfolio to include international stocks.
For more on why we see value in overseas investments, check out our exclusive special reports, Investing Globally—More Variety, More Opportunities and Going Small Overseas—Why It Makes Sense. And if you have any questions about how to use foreign funds in your portfolio, give us a call! We’d be happy to speak with you.
Alternative Strategies and Market Neutral: More Complex Doesn’t Mean More Successful
Last week, Vanguard made it easier and cheaper for investors to access two of its “alternative” funds, Alternative Strategies and Market Neutral. The funds’ minimums are dropping from $250,000 to $50,000. Alternative Strategies is no longer restricted to institutional clients and will be available via financial advisers beginning in November 2019.
So does that mean investors should rush out to buy shares of these funds now that they’re less exclusive? Not so fast.
Alternative Strategies’ stated aim is to deliver returns with low correlation to the stock and 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. markets, with less volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. than stocks. “Low correlation” here means it’s intended to behave differently than stock and bond funds in a portfolio, ideally playing a diversifying role. To achieve these goals, the fund’s managers use multiple strategies—long/short equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid., event-driven, fixed-income relative value, currencies, commodity-linked investments and equity index futures—more commonly seen in hedge funds. Vanguard notes that its 0.66% expense ratio is far lower than industry peers in the “liquid alternatives” category, which charge, on average, 1.49%.
Market Neutral seeks to keep 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. low while generating small, reliable gains by taking equal “long” and “short” positions in large-cap U.S. stocks—the thinking being that if stocks held long and those sold short simply match each other, they’ll earn a cash yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. no matter the direction of the stock market.
Sure, on paper, what the funds promise—returns that are uncorrelated with stocks, managed risks—may seem appealing to some investors. But while delivering on the uncorrelated part of the story, the absolute returns have been fairly lackluster.
Turning first to Market Neutral, you may recall that Vanguard became the sole manager on the fund in mid-2010. The fund giant adopted the AXA Rosenberg-run fund in November 2007 before a coding-error controversy related to AXA’s risk model compelled Vanguard to fire the former sub-adviser. And for the next five years, it was mostly smooth sailing until the fund ran aground. This year, it has practically capsized. Market Neutral is down 8.4% year-to-date through Tuesday, August 6. We can only imagine how shareholders here must feel seeing that Vanguard 500 Index is up 16.2% this year.
Since Vanguard assumed full control, Market Neutral has trailed the firm’s short-maturity high-quality bond fund, Short-Term Investment-Grade—and that’s an incredibly low hurdle to leap.
As for Alternative Strategies, things look a bit better. Since its August 2015 inception, the fund has had virtually no correlation to the stock market and has outperformed Vanguard Total 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. Market Index. But not by much. And it has fallen shy of what had been its stated target of beating cash by 4% a year. (Along with increasing access to the fund, Vanguard quietly named the FTSE 3-Month US T-Bill Index as its new benchmark, replacing the FTSE 3-Month US T-Bill Index +4%, moving the goalposts after failing to achieve that 4% beat.)
We come to the same conclusion we did with our look at Vanguard’s launch of its Commodity Strategy fund earlier this summer. While these funds may sound interesting on paper, you can almost certainly achieve similar or better results without the complexity, uncertainty and higher costs by using traditional investments.
Fancy and exciting may give you more to talk about at a cocktail party. When it comes to investing and building wealth, simple works over time.
Vanguard Reopens DividendA cash payment to investors who own stock in the company. Growth Fund Under Don Kilbride
As discussed above, sometimes paying up for active management doesn’t make sense. That hasn’t generally been the case with Don Kilbride, the helmsman of Vanguard’s Dividend Growth fund. And as of August 1, that fund is once again open to investors.
In a surprise move three years ago, Vanguard abruptly closed its Dividend Growth Fund to new investors when it had $31.5 billion in assets. Since then, Kilbride has gone on to generate a 44.7% return, outpacing Vanguard’s 500 Index and Total Stock Market Index funds as well as the firm’s Dividend Appreciation Index fund over that time.
Today, Dividend Growth has $36.6 billion in assets; had investors simply left their money in the fund and no new money came in, Kilbride would be overseeing a $46-billion-plus portfolio. Obviously, he’s thinking that he can handle some additional cash.
If Kilbride is confident that taking on more money won’t curtail his ability to pick the opportunities he wants to, more power to him.
Our main concern: That Vanguard may be thinking about adding a second sub-adviser to the fund. It’s a move they’ve gone to time and again on some of the larger, more popular funds in their stable rather than shut them down to limit assets. If that happens, all bets are off. (Thus far, a Vanguard spokesman said that firm “has no plans to add another adviser to the fund.”) Kilbride’s track record speaks for itself—let’s hope Vanguard doesn’t create another multi-manager morass by foisting a co-pilot on him.
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