Some Surprising Vanguard Statistics

In high school I had an English teacher who ended every quiz and exam with what he called, with dramatic flourish, "a little potpourri." He meant extra credit trivia questions on whatever we happened to be studying at the time, such as who held the sword that Brutus impaled himself on in Shakespeare's "Julius Caesar" (a minor character named Strato). I thought I'd share some of the statistical miscellany I've accumulated while researching and investing with Vanguard recently. Don't worry. There'll be no test, but feel free to give yourself extra credit for reading.

$67.6 billion
This is the estimated amount of new investor dollars that have flowed into Vanguard funds in the 12-month period ended Aug. 31, 2009, according to Morningstar data. What did Vanguard do to deserve this? Nothing, or at least nothing it hasn't been doing for years. Low costs, sober and diversified strategies, and avoiding the toxic assets at the root of the financial panic helped the family once again benefit from some of its rivals' misfortunes. Big competitors American Funds and Fidelity Investments, for example, have seen outflows of $51 billion and $12 billion, respectively, over the same time period due to disappointing performance at some of their biggest funds last year.

$8,071 and $10,907
The first number is what you would have had left if you put $10,000 in  Vanguard Target Retirement 2010  on its June 7, 2006, inception but got spooked and bailed out on the March 9, 2009, bottom of the bear market. The second number is what you would have earned if you sat tight through Sept. 29, 2009. A 2.7% annualized return doesn't earn bragging rights. An investment in  Vanguard Short-Term Treasury (VFISX) would have done better, gaining 5.7% annualized and turning $10,000 into roughly $12,000 during that time. But the 2010 fund's small advance doesn't quite spell retirement Armageddon, which (as I wrote about in January's newsletter) many retirees who invested in target-date funds feared they faced a few months ago.

Such fears drove the SEC and the Department of Labor to hold hearings this summer on these one-stop funds that were designed to automatically make their asset allocations more conservative as they approach preset retirement target dates. The bureaucrats are under political pressure to do something, such as regulating target-date funds' holdings and glide paths (their schedules for reducing their stock exposures).

Time and recovering stock and bond markets, however, may temper the hue and cry over target-date funds as well as the urgency to enact sweeping reforms.

Surely, 2008 exposed some target-date funds, such as Oppenheimer's Transition 2010 , which lost nearly 42%, as dangerously aggressive. Still, funds that experienced these kinds of disasters accounted for only a small portion of the total assets held in all target-date funds. Furthermore, if you look beyond the bear market, there's evidence that most target-date offerings are behaving as designed. On average, target-date funds lost less than the broad market last year and have rebounded smartly so far this year.

At this point, they also have more upside potential than Treasuries, which became egregiously overvalued as investors sought safety amid the market turmoil. Indeed, Vanguard Target Retirement 2010 has gained more than 34% since March 9 while Vanguard Short-Term Treasury hasn't gone anywhere.

The last year and a half has been rough, but unless investors who put money in the fund three or more years ago cut and ran when the going got tough, they haven't realized permanent damage. Despite the recent turmoil, I still like the idea behind target-date funds. As I wrote back in January, though, Vanguard's Target Retirement funds should serve investors well over time.

803
That's the number of basis points, or hundredths of a percent, by which the returns of  Vanguard Growth Equity  have trailed those of  Turner Core Growth  since Vanguard dismissed the aggressive Turner Investment Partners as a manager of the former fund in mid-January. From Jan. 16 through Sept. 29, Growth Equity, which is now run by the comparatively staid Jennison Associates and Baillie Gifford, has gained 28.85% annualized, while Turner Core Growth, which is run in the same style as Turner once managed Growth Equity, has advanced 36.88%.

Nine months is too short a time to judge Growth Equity's new management regime. Even though it has lagged the large-growth category and the Russell 1000 Growth Index since the manager change, Growth Equity could still turn out to be a decent long-term holding. Scotland-based Baillie Gifford and New York's Jennison have a lot of experience investing in growing, dominant firms with competitive advantages for other accounts and other Vanguard offerings like  Vanguard International Growth (VWIGX) and  Vanguard Morgan Growth . But Growth Equity is clearly not the fund it was when former manager Bob Turner rode solo. The timing of the manager change also was atrocious.

I can't say it better than my colleague Mike Breen's analysis on the fund. "It looks like Vanguard tried to win the last war," he wrote. "A portfolio chock-full of stable, wide-moat firms is never a bad thing. And it was definitely the thing to own going into 2008's brutal market. Baillie Gifford's and Jennison's large-growth offerings both lost a good bit less than this fund in 2008. But Vanguard made its changes while this fund was deep in the hole under Turner, which has always struggled in downdrafts but greatly outperformed in rallies. So longtime shareholders standing pat for a potential bounce-back by Turner may have had some losses locked in by the change. They had Turner's names sold out while they were down and received a wide-moat portfolio only after they needed it most. Indeed, the market has surged of late, and more speculative fare has benefited most�Vanguard is a good steward, but its timing on this change didn't help investors."

-15.5% vs. 2.11%
You call that neutral. That's the return of Vanguard Market Neutral (VMNIX) against  SPDR Barclays Capital 1-3 T-Bill (BIL) from Dec. 1, 2007, through Sept. 29, 2009. When Vanguard adopted and reorganized Laudus Rosenberg U.S. Large/Mid Capitalization Long/Short Equity into Market Neutral nearly two years ago, it said the fund's objective would be to beat three-month U.S. Treasury bills. It hasn't so far.

The fund, on which AXA Rosenberg and Vanguard's quantitative equity group split duties, uses quantitative models, buying stocks the computers like and shorting (selling borrowed shares in the hopes of rebuying them at lower prices and pocketing the difference) stocks the models don't like. The fund tries to keep the aggregate dollar amounts of its long and short positions equal so if the longs rise more than the shorts, the fund can eke out small, consistent gains that don't correlate with other asset classes.

Since becoming a Vanguard fund, Market Neutral hasn't been strongly correlated with any major asset class--REITs, commodities, or the broad stock and bond markets--but rather than eking out gains for investors, it has made them go, "Eek!"

A version of this article appeared in the August 2009 issue of the Vanguard Fund Family Report.

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