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Are These Vanguard Funds Too Hot to Handle?

Plus, T. Rowe's new fixed-income chief will have to think globally, and more.

Morningstar Analysts, 10/12/2009

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

Earlier this week, Vanguard, the more than $1 trillion asset manager, warned investors not to expect the strong domestic and international returns this year to continue forever. The MSCI US Broad Market Index is up 21.6% for 2009 through the end of September, while the MSCI EAFE Index is up an impressive 29%. Both are a far cry from the roughly 10% annualized returns these markets have traditionally returned.

This isn't the first time the firm has issues such a warning; it has issued similar notes when things were running hot in other asset classes, such as REITs, emerging markets, and precious metals.

The company went on to caution that it might be wise "to ensure that your asset allocation is in line with your long-term goals." In other words, reduce, or at least stop adding to, your allocation in the hottest asset classes. Besides closing a mutual fund for performance-related reasons, this is the closest a mutual fund manager gets to protecting investors from themselves and a contrast to other fund shops that would gleefully tout in ads the recent performance of hot funds.

Vanguard singled out four funds in its warning:

Vanguard Capital Value VCVLX
Vanguard Emerging Markets Stock Index VEIEX
Vanguard Precious Metals and Mining VGPMX
Vanguard High-Yield Corporate VWEHX

Vanguard didn't say these funds are in for an imminent fall; it is just reminding investors that hot markets eventually cool and to maintain realistic expectations.

Reversion to the Mean Alert
Some managers have argued there is still room left for the market's recent rally to run. Not so, say a number of other prominent asset managers.

Bob Doll, BlackRock's BLK global equities chief investment officer, wrote in a recent report that the S&P 500 is currently trading at a reasonable valuation based on the expectation that corporate earnings will continue to improve. However, he notes that this data points only to compound annual returns of 6% to 8% over the next several years.

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