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Notable Performers, Reopenings, and Redemptions at Vanguard

Christine Benz
Bridget B. Hughes, CFA

Christine Benz: Hi. I'm Christine Benz for

Vanguard has been one of the fund world's top asset gatherers in recent years, but June was a notable exception. Joining me to discuss that and other notable developments of the firm is Bridget Hughes. She is associate director of fund analysis with Morningstar.

Bridget, thank you so much for being here.

Bridget Hughes: Thanks for having me, Christine.

Benz: Bridget, when you look at Vanguard in terms of performance in the first half of the year, how do the firm's funds do generally, when you go asset class by asset class?

Hughes: As you might expect for a firm that's as large as it is, and especially one that has as many index funds and wants to cover [as many] different areas of the markets as Vanguard does, a lot of the funds … have averaged out to the middle. So on the municipal side, on the taxable fixed-income side and even on the international side, while there is some variation in those category rankings, [they] sort of all neutralize to about the middle of the category.

Benz: Domestic equity a notable exception, though.

Hughes: Exactly. So they're having a pretty good year in domestic equity, and granted it's only been a little bit more than half the year. But the average category ranking for the Vanguard domestic equity funds is 31, which would indicate that they're, on average, in the top third of their categories.

The S&P 500 Fund and the Total Stock Market Fund are each up about 20%, which puts them right about in that 30th-40th percentile, and then they have got a slew of their active equity funds that are really skewing that number up, because really there is nothing in the bottom quartile so far for the year-to-date.

Benz: Can you name a couple of those standout funds in case people are watching and might happen to own them, the ones that are doing really great?

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Hughes: Congratulations to the Capital Value shareholders. I think we talked about that fund before. It's on a streak. It's four-plus years into a bull market, so that kind of aggressive investing has really been rewarded in this kind of market.

The folks at PRIMECAP, one of Vanguard's long-term sub-advisory relationships, are having a really good year, with three of its funds near the top of their categories. Again, it's a patient, contrarian, long-term growth approach. At this point in the bull market you might expect to see that there.

What's been a little bit unusual, or a pleasant surprise, is that some of Vanguard's other funds that might be a little bit more conservative, so say something like Selected Value, which is primarily this traditional, high-quality, low-multiple value approach for the most part--it's got this contrarian kicker with a portion of its assets and is also in the top quartile.

Benz: I mentioned at the outset that Vanguard in recent years has been a huge asset gatherer, one of the biggest winners in terms of the fund flow sweepstakes. But recently, at least in the month of June, we did see a little bit of softness. Where is that coming from? Where were investors pulling their money?

Hughes: Investors were pulling their money out of fixed income, and it's interesting because Vanguard is a big educator in this industry and has spent some time on its website talking about what the right allocation for fixed income is, even in the face of some grumblings in the news or even just this general idea that interest rates eventually are going to have to go up. Despite that, they want folks to recognize what fixed income is for, and that's providing ballast in your portfolio, and make sure that you're not swinging the pendulum [too far] in the other direction--whereas people had run into fixed income previously, that they're not exiting too soon and too much right now.

But that's primarily where the outflows are coming from. Fund by fund, certainly, there are outflows here and there, but really Vanguard continues to see inflows into its passively managed funds, as well as some of its active equity funds.

Benz: And exchange-traded funds, I know, have a strong spot for them, too.

In terms of reopenings, there was a fairly big one in the first half. Let's about that fund. It's one of the PRIMECAP-managed fund that you alluded to earlier. Which fund is it?

Hughes: It's Vanguard Capital Opportunity. It opened in April, and it had been closed for nine years. So it was big news. Again, this is a long-term, growth-oriented portfolio, and it had just been in redemption; when you close a fund, generally that's what happens, … you're going to start to see outflows, and it had been pretty much in redemption for most of the nine years that it was closed. The assets had come down to somewhere around $7.5 billion, and so the fund reopened. Now, we don't know how long it will stay open. It had been closed previously. It opened in 2001 and stayed open for about three years, and closed again. So especially now considering that we've got an uptrending market and the assets are back up to $9.5 billion, this may be a short-lived opening.

Benz: How is that fund different from PRIMECAP and PRIMECAP Core, the other two Vanguard funds?

Hughes: The Capital Opportunity [Fund] has a little bit of a smaller-cap bias. Now, it isn't small-cap. It [has] a good deal of large-cap in there, but also about 40% in mid-cap stocks.

Benz: In addition to Capital Opportunity reopening, there were also a couple of launches during the first half. Let's talk about what those were.

Hughes: So there were two funds that were launched in the middle of the year. These were Vanguard's first forays into international fixed income. It was an area that they had researched and talked about for a number of years. So they've got two now. The first one that came out was in fund that would invest in emerging-markets government bond funds. It's dollar-denominated only, so there are not any real currency issues to haggle with. The second one, which just came out few days later, was an investment-grade government bond index fund.

Benz: Those launches had some implications for the firm's target-date lineup as well?

Hughes: They did. So for the target-date lineup, as well as some of the asset allocation funds of funds that Vanguard has, what they did is they increased from essentially nothing the allocation to international fixed income. So whatever piece of the allocation is in fixed income, 20% of that will be invested in international fixed income now.

There were a couple of other changes on the fixed-income allocation. Essentially they took out the Vanguard Inflation-Protected Securities Fund and in place of that put in a Short-Term Inflation-Protected Securities Fund. The idea there, with the international fixed income addition, is to take advantage of the smaller correlations that come along, so it helps with diversification. And then on the inflation-protected side, to shorten the duration, to take out some of the volatility. But the idea is, over the long term for both correlation reasons and shorter-duration reasons, to smooth out and take away some of that volatility.

Benz: Vanguard is obviously a firm of high interest to a lot of our viewers. Thank you so much for being here to provide a recap of what's been going on.

Hughes: Thank you.

Benz: Thanks for watching. I'm Christine Benz for