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The No-Load Fund Investor The No-Load Fund Investor

Highlights of the Current Issue
of The No-Load Fund Investor

From The No-Load Fund Investor, 3/14...

War and Money

After declining in January, the stock market renewed its advance in February. Such major equity indexes as the S&P 500 (large-cap U.S. stocks), Russell 2000 (small-cap U.S. stocks) and MSCI EAFE (foreign developed markets) rose by at least 4% and are up a smidgen for the year. Though led by the healthcare sector, gains were broadly dispersed among most kinds of stocks and equity funds.

Also, as various reports came in implying less economic growth than expected, longer-term, higher-quality bonds rallied. Specifically, most high-quality municipal bonds were strong, as were Treasuries.

Best Buys Commentary/Changes. We always look at broad classes of assets to see if we want to make allocation changes within the Best Buys models. One area we examine is emerging market equities, in which we recommend relatively little exposure currently.

Emerging markets were up a little in February but have been generally underperforming dramatically for some time now. Are they a good value currently? Though their valuations are generally quite low, we think there is still some danger there, generally speaking, for several reasons. One, economic growth has slowed in such major emerging countries as Brazil, India, Russia and China. Two, demand from China has fallen for copper and some other industrial commodities, some of which are important to emerging market exporters.

Three, some emerging countries are increasing interest rates to fight inflation and protect their currencies. We also note that despite some institutional advances, parts of the emerging world continue to be plagued by political instability and war. One need only look at the current situation in Ukraine to see that the peace we tend to take for granted here in the U.S. is much more fragile in many other nations.

Large Cap Growth at Vanguard

Though ostensibly a mid-cap growth product, Vanguard Capital Opportunity (VHCOX) has transformed over the years into a large-cap growth fund that includes some mid-cap growth stocks. In fact, its median market capitalization of nearly $30 billion is only a few billion shy of that of the actively managed funds the firm publicly categorizes as large-cap growth.

Therefore, now that Vanguard has closed Capital Opportunity to new investors, we thought it would be a good idea to discuss their large-cap growth funds that continue to be open. First, let’s take a few seconds to define the term “large-cap growth.” All it means is a large-cap stock or portfolio of such stocks with faster than average growth and higher than average valuations than the average of all large-cap stocks. It also suggests above-average quality, below-average debt, relatively tiny dividends and a concentration in growing areas of the economy.

Though broad portfolios of ‘value’ stocks have outperformed broad portfolios of growth stocks over decades, growth sometimes outperforms value over shorter periods, even several years at a time. One point in favor of the large growth segment right now is strong profit growth relative to valuations. For example, though the price/earnings ratios (P/Es) in the segment are well above 20, the earnings growth has been in the mid-to-high teens.

The result is a so-called PEG ratio (P/E to growth ratio) that’s much more attractive than those of any other size/style segment (e.g., large-cap value, small-cap growth, and mid-cap blend). So, while we will remove Vanguard Capital Opportunity from Best Buys due to its closed status, we still want followers of our Vanguard Wealth Builder and Pre-Retirement Best Buys models to maintain exposure to large-cap growth stocks. Further, those currently in Capital Opportunity may wish to stay there.

Vanguard’s lineup of open large-cap growth funds starts with an index offering: Growth Index (VIGRX on ‘Investor’ shares). Over the three-year period ended Feb. 28, 2014, the fund produced an annualized gain of 15.4%, vs. 14.2%forVanguard 500 Index (VFINX; a good proxy for the broad large-cap market).

Like Vanguard’s other index funds, Growth Index has minuscule expenses. The expense ratio of its Investor shares is only 0.24% (and just 0.10% if you meet the $10k minimum for Admiral shares), vs. an average expense ratio among large-cap growth funds of 1.25%, according to Morningstar. The fund’s turnover ratio also is low, suggesting low commission costs within the fund as well as low taxable distributions for its shareholders. In fact, despite strong total returns and some index turnover, the fund has not made a capital gains distribution for at least the past 10 years. For more of our in-depth analysis of Vanguard’s large growth funds, see the March issue of The No-Load Fund Investor.


Model Portfolios

Sample Model Portfolio from the Current Issue
of The No-Load Fund Investor

Wealth Builder Portfolio

Fund

Obj.

Beta

% Weighting

Price Health Sciences sector 1.03 5%
Price Divsfd Small Cap Gr agg gr 1.35 10%
RiverPark Large Growth growth 1.12 5%
Vangd Total Stock Market Idx growth 1.07 15%
Amer Century MidCap Val growth 0.94 10%
Causeway Int'l Value int'l 1.36 5%
Wasatch International Growth int'l 1.18 5%
Artisan Global Opps global 1.18 10%
Artisan Global Value global 0.94 5%
Vangd U.S. Value gr-inc 1.11 10%
Vangd Equity Income gr-inc 0.83 10%
TCW Emerg Mkts Local Curr bond 0.64 5%
Vanguard Prime Money Market money mkt 0.00 5%
* = Estimated
N = New this month
H = Hold
W = Change in portfolio weighting
D = Deleted this month
Average portfolio beta: 1.02
Average expense ratio: 0.82%
Since January 1, 1988, $10,000 has grown to $143,278


Best Buy Portfolios

 

Wealth Builder

Pre-Retirement

Retirement

Income & Preservation

Cash 5% 10% 15% 20%
Bonds 5% 15% 30% 60%
U.S. Equities 75% 65% 50% 15%
Int'l Equities 15% 10% 5% 5%
Portfolio returns since 1/1/88 through most recent month ($10,000 original investment) $143,278 $129,230 $99,893 $14,718
since 2/1/09
Average portfolio Beta 1.02 0.85 0.60 0.31
Average expense ratio 0.82 0.78 0.61 0.60

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