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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, 11/14...

Grand Old Rally

After a rough go of it during the first half of October, the U.S. stock market recovered and ended ahead for the month. In a departure from the situation in place since the beginning of the year, small-cap stocks outpaced large-cap ones. In fact, the small-cap funds in our database gained an average of 4.9%, vs. an average of 2.2% for large-cap funds.

The best performing areas of the markets continued to be interest-sensitive equities, including electric utilities and real estate investment trusts, along with various segments of the broad healthcare sector. However, while most sectors gained in October, energy and materials were major exceptions. On average, the natural resources/metals funds we track plummeted 9.5%, and were down nearly 8% year to date. Also suffering (though not as much) were foreign stock markets, many of which lost value in the month and are down for the year. In fact, the MSCI EAFE Index of foreign developed markets was down more than 5% through October, rendering it exceedingly difficult for geographically diversified funds (and models) to compete with the S&P 500 so far this year.

Volatility has increased not so much because of whatís going on in the United States, but rather as a result of overseas factors. Recent economic reports in the U.S. have been quite good, generally speaking. The bulk of corporate earnings reports in this country also have been decent. However, with a few exceptions, overseas developed economies arenít doing nearly as well. In the second quarter, the German and Italian economies shrank 0.2%, while France experienced no growth. (For the entire Euro region, the economy was flat.) Meanwhile, Japanís economy decreased in size by 1.8%.

Vanguardís Global Funds

While many U.S. stock funds include small percentages in overseas equities, funds classified as global are designed specifically to offer exposure to stocks in the U.S. and abroad. Vanguard offers three such funds: an index fund; an actively managed fund with a conventional return objective; and a newer fund designed to provide some of the potential profits of global equity investing in a framework of below average volatility.

Letís discuss the newest fund first. It is called Global Minimum Volatility (VMVFX), which Vanguard launched last December. This is an actively managed fund run by the Vanguard Equity Investment Group, the same organization that runs such successful offerings as the firmís Strategic Equity (VSEQX), Strategic Small Cap Equity (VSTCX) and U.S. Value (VUVLX) funds. Despite its emphasis on low volatility instead of high total return, Global Minimum Volatility has produced one of the highest total returns among all global equity funds so far in 2014. In the first 10 months of the year, the fund generated a total return of 10.8%, while the average return of the funds in the Global Equity category of our Performance Comparison tables was only 3.4%.

The managers of the Global Minimum Volatility fund attempt to provide broad global equity exposure with a lower degree of share price fluctuations, as compared to those of the average global stock fund. They employ quantitative models to evaluate the companies in the fundís benchmark, the FTSE Global All-Cap Index (Dollar Hedged), a capitalization-weighted index covering stocks in developed as well as emerging markets. They search for lower-risk stocks and combine them in such a way as to further limit the portfolioís volatility. The fund includes about 200 stocks, vs. about 7,500 in the benchmark.

The managers also limit risk through diversification, which they ensure by carefully managing the fundís weightings in countries, sectors, industries and individual stocks. Specifically, weightings in the benchmarkís larger countries range within about five percentage points of the benchmark. (The range for smaller countries within the benchmark is narrower.) The range for sectors and industries is also five percentage points relative to the benchmark. The fundís maximum position size in any one stock is 2%. Additionally, the managers eliminate most of the international currency risk through hedging into U.S. dollars.

For more in-depth analysis of Vanguardís Global Funds, see the November 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 0.92 5%
Price Divsfd Small Cap Gr agg gr 1.30 10%
RiverPark Large Growth growth 1.18 5%
Vangd Total Stock Market Idx growth 1.07 15%
Amer Century MidCap Val growth 0.92 10%
Artisan Global Sm CP global 1.23* 5%
Causeway Int'l Value int'l 1.21 5%
Dodge & Cox Global Stock global 1.20 5%
Artisan Global Opps global 1.17 10%
Vangd U.S. Value gr-inc 1.09 10%
Vangd Equity Income gr-inc 0.90 10%
Fidelity New Markets Inc. bond 0.43 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: 1.01
Average expense ratio: 0.77%
Since January 1, 1988, $10,000 has grown to $150,155


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) $150,155 $135,807 $103,249 $15,099
since 2/1/09
Average portfolio Beta 1.01 0.85 0.61 0.29
Average expense ratio 0.77 0.73 0.61 0.61

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