AdviserOnline Blog

Total World Stock Index Launches, Fees Drop

2008-06-26T22:01:58Z

Vanguard Total World Stock Index (ticker symbol: VTWSX) is now trading. Tracking the FTSE All-World Index, a benchmark of a bit under 3,000 stocks in 47 countries, it's the first global stock index fund at Vanguard, coming head to head with Global Equity (VHGEX), Vanguard's actively managed global fund. Duane F. Kelly and Ryan E. Ludt will co-manage the new fund from within Vanguard's indexing shop.

Like many of the Vanguard index funds, Total World Stock Index comes complete with ETF shares (ticker symbol: VT). The fund's investor shares come with a 0.25% front-end load (Vanguard calls it a "purchase fee") and a 45-basis-point expense ratio, while the ETF has a 25-basis-point expense ratio.

As with any Vanguard index fund with a front-end load, if you're investing anything more than a token amount, it pays to go with the ETF unless you'll be adding lots of additional investments that will push up your brokerage costs. At a minimum of $3,000 to invest in the fund, you'll pay $7.50 in front-end loads. If, like me, you pay just $8 per brokerage transaction, you don't have to be investing much to make the ETF pay off.

Speaking of loads, Vanguard also cut the front-end and back-end loads on Emerging Markets Index (VWO) to 0.25%, or 25 basis points, from 50 basis points, making the fund a bit more competitive with its ETF sibling. Plus, they've taken the 25-basis point front-end load off of World ex-US Index (VEU).

Despite the low fees on the new Total World Stock Index, I'm not sure this is the best way to go for global diversification. For a review of why, check out my story on page 12 of the May issue of The Independent Adviser for Vanguard Investors.

Nightly Business Report Transcript

2008-03-12T21:18:22Z

Yesterday evening, I appeared on Nightly Business Report with Jim Lowell, editor of the Fidelity Investor newsletter and my partner at our asset management firm Adviser Investments.

We spoke to our host, Paul Kangas, about some of the best funds to invest in at Vanguard and Fidelity during these volatile times, as well as some of the recent changes at both companies. For example, Vanguard announced recently that CEO John Brennan will be replaced by William McNabb.

Videos of each day's program are archived at the Nightly Business Report Streaming Videos page. If you didn't catch last night's program, you can read the transcript of our conversation.

Catch Me on Nightly Business Report Tomorrow

2008-03-10T18:34:16Z

This Tuesday evening, Jim Lowell, my partner at our asset management firm Adviser Investments, and I will be appearing on Nightly Business Report. As you may know, Jim is also the editor of the Fidelity Investor newsletter. We'll be discussing how to manage fund investments at Vanguard and Fidelity during an economic slowdown with our host, Paul Kangas.

Please check your local public television station for the show's time. You can find out when the show airs and which channel it shows on in your local area at www.pbs.org/nbr. I hope you'll tune in.

Manager Musical Chairs

2008-02-27T17:19:44Z

February is often manager-musical-chairs month at Vanguard, and since I wrote about Earl McEvoy's retirement, Vanguard has announced more manager changes. Subscribers to my newsletter can read my full analysis on these management changes in the news section of my website, but here's an overview.

First, Vanguard ousted Grantham, Mayo, Van Otterloo, which manages some $150 billion in assets and is the home of noted perma-bear Jeremy Grantham. The quantitative group had originally been brought into Vanguard to run a piece of Explorer in the spring of 2000 (but wasn't handed a piece of the Small Company Growth Annuity until the fall), then were the founding managers of U.S. Value when it debuted in June 2000. Vanguard's own quantitative equity team will replace GMO.

The GMO firing raises, once again, the question of whether Vanguard's disclosures are adequate or accurate. In U.S. Value's September 2007 annual report, published in November, just three months ago, Vanguard's Board says that retaining GMO is "in the best interests of the fund and its shareholders." Could they have changed their tune so quickly as to turn around and fire GMO just a few months later?

Vanguard also announced that International Growth is adding a third manager—M&G Investment Management, which has run Precious Metals & Mining since its inception. The question we have to ask here is, will the addition of another management team turn it into an index-hugging foreign fund?

As I've always said, when it comes to mutual funds, you're not just buying a fund, you're hiring the manager. That's why monitoring changes in fund management and knowing the long-term track record of managers is one of my top priorities, and should be yours, too.

Manager of Vanguard Wellesley Income, High-Yield Corporate, and Long-Term Investment Grade Retiring

2008-02-14T15:08:38Z

The news is out: Earl McEvoy, manager of the bond portion of Vanguard Wellesley Income Fund (VWINX) and lead manager of Vanguard High-Yield Corporate Fund (VWEHX) and Vanguard Long-Term Investment-Grade Fund (VWESX), will be retiring on June 30, 2008. You can read the full press release at businesswire.com.

Of course, this is no surprise to subscribers to The Independent Adviser for Vanguard Investors, as I notified them of the upcoming change in the latest FFSA Independent Guide to the Vanguard Funds.

Under McEvoy's leadership, High-Yield Corporate has been in a class by itself. While its higher-quality bias relative to other junk bond ("high yield") funds has caused it to lag at times, it holds up better in down markets, and the fund's methodology kept it from investing in any issues collateralized by subprime borrowers. But it's not a no-risk fund, and you'll pay a 1% back-end load that Vanguard calls a "redemption fee" if you sell shares held less than one year. McEvoy will be replaced by Michael L. Hong of Wellington Management on this fund.

As for Wellesley Income, it's been an exceptional offering for risk-averse income-oriented investors, though of course it can't compete when stocks are charging ahead of bonds. I don't expect many changes to result from McEvoy's retirement. His replacement, John Keogh, is a solid value stock manager with Wellington Management's full backing.

While McEvoy's departure is no cause for celebration, given his long and reliable tenure, I'm confident in Wellington Management's deep pool of talent, and expect to see little if any noticeable effect on the three funds' performance once the transition is complete.

Even so, it's important to know just who's running your fund, and that's why I keep a close eye on manager changes, as well as what managers are investing in their own funds, or as I like to say "eating their own cooking," and how much. And that's not to mention where the Vanguard directors are investing—for all Vanguard's talk about indexing, you might be surprised where their money actually goes. Of course, finding out is easy for subscribers to my newsletter. I do all the heavy lifting and report on manager and director holdings for all Vanguard funds each year. For the record, McEvoy had over $1 million of his own money invested in Wellesley as of Sept. 30, 2007, but held no shares of High-Yield Corporate or Long-Term Investment Grade.

Sales Leapfrog at the Fund Giants

2008-02-13T21:13:16Z

As I've often told subscribers to The Independent Adviser for Vanguard Investors, the ETF business is booming, and Vanguard has taken every opportunity to grab its piece of the pie since it launched its first ETFs, then called "VIPERS," in 2001. Thanks to its success in the ETF business, it is once again the "nation's top-selling fund company," as Investment News put it:

Propelled by sales of its exchange traded funds, The Vanguard Group Inc. regained its status as the nation's top-selling fund company last year, edging past rival American Funds, which had been No. 1 since 2002.
Investors poured a net $76.2 billion into Malvern, Pa.-based Vanguard's stock, bond and ex-change traded funds last year, compared with $74.7 billion for American Funds, according to Boston's Financial Research Corp.

While there may not be much there for investors like you and me to be excited about, one thing is clear, and it's something I've told my subscribers for years: Vanguard is hands-down the best place to find low-cost mutual funds and ETFs. In fact, it's those low costs that often make the difference between outperformance and underperformance.

Indexing, Mate

2008-02-11T18:57:03Z

Vanguard's Australian operations are gaining steam, and like their U.S. counterparts, the Australian Vanguard team members are big proponents of index investing. But in the rush to develop investors' "indexing quotients" or, as Vanguard likes to put it, their IQs, the company's Plain Talk Library confuses rather than educates. In one online "test," my favorite question reads: "True or false. An index must hold all of the securities in a particular index."

You and I know the answer is "true." Of course an index must hold all the securities in an index. Duh! But because Vanguard meant to ask if an index fund must hold all the securities, the true answer is "false."

I'm assuming this is just some of that down-under humor, mate.

Time to sell stocks? I think not.

2008-01-18T20:30:11Z

It's certainly been a difficult couple of weeks since the calendar turned to 2008 with the Dow index having fallen 9%, the S&P 500 index down 10% and the NASDAQ Composite down 12%. The fear on Wall Street, at least as implied by market action, suggests we are headed for an economic disaster. This simply is not the case.

Let's look at an example. IBM, following in Dupont and GE's footsteps, pre-reported a strong Q4 on Monday (a 24% increase in earnings per share over last year's Q4) and stocks rallied on the news. Remember that IBM sells deeply into the financial services industry, so a strong quarter in spite of the troubles in the banking sector should be seen as a good sign. Two, IBM is something of a bellwether of overall corporate spending. Again, a good sign.

So, what's the strategy here? Unless you want to try your hand at market-timing, which is a fool's errand, there isn't one. Here's why:

No one can tell where the bottom of a recession, or a stock market for that matter, will be.
The average recession lasts 11 months and generally occurs when stocks and/or interest rates are much higher than they have been in this cycle.
Yes, the Congress may come up with an attempt at a quick fix. While I don't think this will actually do anything short-term, it will help confidence.
Running to oil and gas, and maybe gold, is not necessarily a solution or a quick fix for your portfolio. A faltering economy or consumer could mean less demand for these commodities: Oil, which had a trade or two at the $100 per barrel level, is now trading below $90.
Cash looks great when everything else is falling, but it won't look so great the minute the markets turn around and you're stuck still earning a tiny yield, which, by the way, is going down as the Fed cuts rates.
REIT saw some great returns from 2000 through January 2007, and then over the past 11.5 months, they've lost almost one-third of the gains earned in the prior 7 years!
There's a short-term benefit to bonds, maybe, but with the 10-year yielding 3.6% or so, what's the return after taxes and inflation? When the stock market turns up—and it will turn up—a couple of decent days in the 2% range will more than make up for a year's interest on a 10-year Treasury.
Stocks are now officially on sale. Ever heard the expression "buy low and sell high?" This is "buy low" time.

Hang in there. And remember that you buy low and sell high, not the other way around.

MutualFundWire wants to know

2007-12-21T21:07:18Z

MutualFundWire asked me for my latest take on Vanguard's three new ETFs. You can access the complete release here.

Some Stocking Stuffer Suggestions

2007-12-18T21:12:52Z

Stumped for holiday gift ideas? Even in this high-tech media age, I say there's nothing more satisfying than a good read. While I continue to enjoy the classics (I re-read Homer's Odyssey in a new translation recently, and it was fabulous) as well as good novels, every once in a while a few books with a Wall Street twist come along that make their way onto my night table. Allow me to share a few of my favorites.

Wall Street Noir
Peter Spiegelman, Editor

To diversify your reading, mix the Pavlo non-fiction with this compendium of smart, dark short stories written by some of the crime genre's leading lights. In addition, there's even a story by the discredited former Merrill Lynch technology analyst Henry Blodget. Short stories make great bedtime reading.

King Of The Club
Charles Gasparino

Charlie Gasparino is a dogged reporter who got deep inside the New York Stock Exchange and the controversy over Dick Grasso's multi-million dollar retirement package, and he tells a fast-moving tale about greed, strong personalities and the politics of power in this new book. I'm a friend and fan of Charlie's, so take my comments with a grain of salt. That being said, you'll find this tale fascinating.

Stolen Without A Gun
Walter Pavlo and Neil Weinberg

Who knew that selling, re-selling and cheating in the long-distance telecom business could be so simple, and so lucrative? To get a unique insight into how MCI blew up and eventually led to WorldCom's demise, check out this tell-azll by Walter Pavlo, the jailbird who stole $6 million from MCI before he was finally disconnected. Fast-paced writing by Forbes editor Neil Weinberg keeps the story on the fast track--like a train heading into a concrete wall. Happy holidays!

Don't Let the Tax Tail Wag the Profit Dog

2007-12-05T20:45:14Z

Tax efficiency is a fine thing, but not if the price is lower returns. Profit is a dollar you can spend—unlike tax-efficiency, which you can't. That's why I've said for years it isn't tax efficiency that investors should strive for, it's after-tax returns.

And Vanguard has finally gotten the after-tax religion. In fact, Vanguard wrote that focusing on a low turnover rate as the key to fending off distributions was a "flawed" approach. So what should you focus on? Simple: how much you keep after you pay Uncle Sam.

Every year in The Independent Adviser for Vanguard Investors, I take a look at the tax-efficiency and after-tax returns of all Vanguard funds for three-year and five-year periods. Instead of showing you what's popular with the press, like low turnover ratios and low capital gains distributions, I show you what funds have given the most bang for your buck over the long term when all is said and done, including your taxes.

As you can see from just the top 5 funds over in the three-year table, the most tax-efficient funds and the best performers are completely different.

Three-Year Tax-Efficiency and Tax-Adjusted Returns
	3-Year Return	Tax-Adj. Return	3-Year Tax-Eff.		3-Year Return	Tax-Adj. Return	3-Year Tax-Eff.
Vanguard Growth Equity	6.5%	6.4%	99.9%	Vanguard Energy	33.2%	32.5%	98.0%
Vanguard SmallCap Growth Idx.	12.2%	12.1%	99.7%	Vanguard Emerging Mkts. Idx.	29.2%	28.7%	98.4%
Vanguard U.S. Growth	6.6%	6.5%	99.2%	Vanguard Precious Metals	27.8%	26.3%	94.5%
Vanguard T-M SmallCap	14.7%	14.6%	99.1%	Vanguard International Explorer	27.4%	25.6%	93.4%
Vanguard MidCap Index	15.9%	15.7%	98.6%	Vanguard REIT Index	25.5%	23.7%	92.9%

For the five-year period, while several of the same funds show up, the story hasn't changed: The most tax-efficient funds don't necessarily leave the most profits in your pocket after you've paid your dues.

Five-Year Tax-Efficiency and Tax-Adjusted Returns
	5-Year Return	Tax-Adj. Return	5-Year Tax-Eff.		5-Year Return	Tax-Adj. Return	5-Year Tax-Eff.
Vanguard SmallCap Growth Idx.	11.3%	11.2%	99.7%	Vanguard Precious Metals	34.7%	33.2%	95.5%
Vanguard Growth Equity	2.9%	2.9%	99.4%	Vanguard Emerging Mkts. Idx.	25.8%	25.3%	98.4%
Vanguard T-M SmallCap	12.4%	12.2%	99.0%	Vanguard Energy	25.7%	24.9%	96.5%
Vanguard Emerging Mkts. Idx.	25.8%	25.3%	98.4%	Vanguard International Explorer	22.9%	21.8%	95.2%
Vanguard Extended Mkt. Idx.	11.9%	11.7%	98.3%	Vanguard REIT Index	22.7%	21.0%	92.6%

You need look no further than a fund like Vanguard Growth Equity , with its 99.9% three-year tax efficiency and 99.4% five-year tax efficiency, to get the point. While the fund's shareholders weren't paying much in the way of taxes over the past five years, they also weren't earning much in the way of returns. Over five years, Growth Equity's after-tax return was second-worst only to Vanguard U.S. Growth , which both lost money and paid out a tiny bit of income. U.S. Growth ended up with negative tax efficiency.

Analysis that shows where to find strong after-tax returns is also one reason why I've told my subscribers for years now that investing in index funds is not the path to guaranteed outperformance. Just because many index funds are "tax efficient" and have low turnover doesn't mean they'll make you richer, faster, as Vanguard Extended-Market Index and Vanguard SmallCap Growth Index demonstrate.

So this distribution season, as you make decisions about how to reallocate your portfolio and what funds to buy or sell, don't let the tax tail wag the profit dog. Instead, be a tax-smart investor, and consider what you keep after you pay the tax man.

'Tis the Season for Distributions

2007-11-26T17:50:19Z

November isn't over yet, but it's none too early to be thinking about tax time. Every December, mutual funds distribute their capital gains for the year to shareholders, and Vanguard funds are no exception. Many shareholders panic at the resulting drop in net asset value or end up paying taxes on money they just invested. You need to understand what's really going on and how to prepare for it.

The key is knowing where capital gains distributions come from. When mutual funds sell securities for a profit, the capital gains have to be given to shareholders. This is usually done in December after all the realized gains for the year have been tallied.

Up until the December distribution, the mutual fund's share price includes any undistributed capital gains. So when the distribution finally comes, the share price drops by the amount of the distribution. That doesn't mean shareholders have less money. It just means some of it has been converted to cash or, if reinvested, additional shares in the fund. So if you see your fund's net asset value drop suddenly one day in December, don't panic. It's what happens after a distribution.

Unfortunately, capital gains are taxed to the fund's shareholders regardless of when they bought their shares. That means if you invest the day before the distribution, you still have to pay taxes on all the gains the fund made during the year before you bought shares, even though you don't have any more money than you started with. So you should never invest large sums of money just prior to a distribution.

The good news is you can avoid unpleasant surprises like these by taking a look at expected capital gains distributions for your mutual funds. I do this every year with all of the Vanguard mutual funds and report it to my newsletter's subscribers as soon as I've got the estimates together. Here are the expected top 5 gainers at Vanguard, expressed as a percent of net asset value:

Fund	Gain as % of NAV
Vanguard International Explorer	11.6%
Vanguard Windsor II	9.5%
Vanguard U.S. Value	9.5%
Vanguard Strategic Equity	9.4%
Vanguard Growth & Income	8.7%
Note: Data as of September 2007.

Now, remember two things. First, just because you shouldn't buy before a distribution doesn't mean you shouldn't own a fund at all. Wait until the distribution is out of the way so you can buy shares without an unnecessary tax penalty.

Second, just because a fund is making a big distribution doesn't mean it's the best fund to own. Losing funds can still generate capital gains, and good funds can avoid big capital gains with good tax management. I'll tell you more about tax efficiency and how to distinguish the best funds in my next blog entry.

Moving Benchmarks

2007-11-08T14:53:37Z

Benchmarking is, as I've written in the past, something of a moving target. Investment advisers, fund managers and yes, even newsletter writers seem to have myriad benchmarks against which they like to measure themselves or others. I've tried to be very consistent over the years, comparing performance for my Model Portfolios and Vanguard's funds to either 500 Index or, when it became available, Total Stock Market, as the kind of golden standard for performance.

But others like to mix and match. Now Vanguard is proposing that new benchmarks be created for measuring the performance of life-cycle funds like their Target Retirement funds. Why? Well, for one reason, no two life-cycle funds from different fund sponsors are exactly alike even if, for instance, they both have the year 2015 in their names. Vanguard's proposal, which they admit is a work in progress, is to have one benchmark that measures performance against the return needed to amass enough assets to have a successful retirement (which could mean dying with $1 left in your bank account, or something different) and a second that would measure returns against the fund manager's return expectations (which, of course, wouldn't be too onerous for Vanguard since its Target funds are primarily funds of index funds).

My favorite response, however, comes from John Prestbo, the man in charge of all of the Dow Jones Indexes and someone who knows something about index creation. He told Investment News that the problem is that fund companies want "a benchmark that mirrors their own mix, except not as good." I wish I'd said that.

Check me out in today's Wall Street Journal

2007-11-05T20:14:45Z

The media often turns to me when they need an unbiased viewpoint on mutual funds. Today's Wall Street Journal features a piece about stock-picking in the age of index investing. I give my two cents on why Selected Value's true performance cannot be measured against its benchmark. Check it out.

The Politics of Health Care

2007-10-30T13:56:36Z

I've been asked several times what the impact of a Democratic White House might be on Health Care--the unspoken worry being that some form of "socialized medicine" will kill drug company profits, among other things. (Remember, the drugs are the biggest portion, by far, of the health sector in terms of profits and company size.) My response is that (1) while I am in full support of the goal of insurance for every U.S. citizen, I (2) don't think it will impinge on the drug companies beyond some adjustment to their profits. But they certainly aren't going out of business, and (3) other sectors of the health care industry, from device makers to care providers, aren't simply going to disappear.

On the drug front, remember that it can cost billions of dollars in research and development to bring a drug to market. And billions can be wasted. Why would a drug company be willing to risk that kind of money on R&D if the government is going to control their profit potential (unless of course the government wants to subsidize the research as well, which it surely doesn't)? A clear and present example: Pfizer's (PFE) announcement in early Oct. that it would halt the sale of, and cancel any further development of, its inhaled insulin product. That little announcement, that the drug has sold a miserable $12 million worth this year versus projections it could be a $2 billion a year product, took a $2.8 billion hit to Pfizer's pre-tax profits. And if that wasn't enough, last week Eli Lilly announced it was halting trials on a blood-thinning drug that they had hoped would bring in at least $1 billion per year. It's hard to recover all the time and money spent on a drug that, in the end, doesn't pan out. And too much control of drug company activities and profits could kill the R&D spending pipeline. And no one wants to see all the new drugs and profits that go with them coming from companies based in Japan or the U.K.