vgfa 2013-09

A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 23, NO. 9

Taper-on, Taper-offFunny, but For all the talk of “risk-on” and “risk-off” earlier this year—as europe’s markets and economies were teetering on the brink, backing away and then pushing to the edge again—I haven’t heard anyone talking about “taper-on, taper-off.” but that’s what’s been driving the markets of late (besides the slow build towards a strike on Syria), and in the perverse logic that only Wall Street can conjure, strong economic news, which should be good for stocks, instead suggests Fed tapering, and stocks sell off.

yes, there are those who believe the Fed’s stimulus program is the only thing holding the u.S. economy together, and so when the thundering herds (of sheep) begin to see light and brightness in the economy, they instinctively sell. as I said, it’s perverse.

hopefully, some of the rumor that is driving prices will be put to rest on September 18 after the Fed’s two-day meeting, where I expect they’ll say they are, at most, tapering a tiny amount. My bet’s on no taper at all. Why? For one thing, have you noticed what’s happened to home mortgage rates since the taper tantrum began? they’re up big, and if tapering (or the talk of tapering) cracks its foundation, then the entire house comes tumbling down. kill the housing recovery and you kill the labor recovery, the durables recovery (July’s report notwithstanding), the materials recovery and more.

of course, bond market scare tactics were out in full force in august. one adviser who I thought knew better cited the rising yield of the “typical” long bond having hit 3.84% in mid-august. typical? 3.84%? that’s the 30-year treasury, which is about as typical a bond for most investors as Corvettes are typical two-seaters.

the standard measure of the bond market is the 10-year treasury, where the volume is currently 50% larger than that of the 30-year. that’s why it’s often referred to as the “benchmark bond.” the yield on the 10-year treasury was 1.76% coming into 2013.

The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.

FUNDS FOCUS > Growth Funds—LarGe-Caps

Opportunity, With the Right NavigatoropportunIty reMaInS, but check your expectations at the door. that was my mes-sage on aggressive growth funds last month, and—spoiler alert—it applies to large growth funds as well.

let’s start at the beginning: What do I mean by growth?I consider a growth stock one where a company is growing earnings faster than the

overall market, and is generating little or no yield. over the past several years, some growth companies have built up huge cash hoards, and a few, like apple, have recently given in to the pressure and started to return some of that money to shareholders in the form of dividends and hefty stock buybacks.

DOW JONES INDUSTRIALS

August Close: 14810.31

STANDARD & POOR’S 500August Close: 1632.97

2700

2950

3200

3450

3700

AJJMAMFJDNOS

NASDAQ COMPOSITEAugust Close: 3589.87

0.00%

0.04%

0.08%

0.12%

0.16%

AJJMAMFJDNOS

3-MO. TREASURY BILL YIELDAugust Close: 0.02%

1.4%

1.8%

2.2%

2.6%

3.0%

AJJMAMFJDNOS

10-YR. TREASURY NOTE YIELDAugust Close: 2.75%

12000

13000

14000

15000

16000

AJJMAMFJDNOS

1350

1450

1550

1650

1750

AJJMAMFJDNOS

AVERAGE VANGUARD INVESTOR*August: -2.0 YTD: 6.4%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

AJJMAMFJDNOS

*See the footnotes on page 2.

Model Portfolios ............................................................... 2When the Facts Change ................................................... 3Performance Review ................................................... 8-11Beware the Bloat ............................................................ 12Yield Confusion ............................................................... 13September’s Payouts ...................................................... 13Breaking an Alliance ....................................................... 14Dan’s Do-It-Now Action Recommendations ................... 16

PIN 1375

SEPTEMBER 2013

SEE TAPER PAGE 15 >

S P E C I A L E X P A N D E D 1 6 - P A G E I S S U E

>SEE FOCUS PAGE 4

2 • Fund Family Shareholder Association www.adviseronline.com

This MonTh’s Changes We sold gnMa on Aug. 30 at $10.39 and bought short-Term investment-grade at $10.65. Please see page 3 for the details

about our Model Portfolios The growth portfolio is aimed at investors with long time horizons who can withstand a certain amount of monthly volatility in exchange for above-average returns. Most appropriate for younger investors who continue to add money as markets gyrate. Since inception the model has been slightly less volatile than the stock market. The Conservative growth portfolio is appropriate for investors seeking to match the market’s risk-adjusted returns over time. Since inception it has been just 80% as volatile as the stock market. The income portfolio is designed for investors who desire a higher level of income plus the opportunity for capital growth with low risk, such as retirees or near-retirees. Since inception the model has been only two-thirds as volatile as the stock market. Returns have been substantially higher than the bond market. The growth index model is designed for young investors who wish to index exclusively. All Model relative volatility figures are measured against the stock market.

When trades are recommended we will announce them on our Hotline and they will also appear on this page.

our average Vanguard investor index (see page 1) measures the monthly performance of the typical Vanguard fund investor. The aver-age Vanguard Investor index (VII) is a dollar-weighted performance measure for the entire Vanguard fund group, including stock, bond, balanced and money market funds. It provides a yardstick against which to measure an indi-vidual portfolio’s performance.

noTe: All returns are total returns with dis-tributions reinvested. Flagship investors may open new accounts in all “closed” funds in the model portfolios. If you don’t qualify, here are some alternatives. While Capital opportunity has reopened I still recommend investors consider PRiMeCaP odyssey aggressive growth (POAGX) as an alternative. PRiMeCaP odyssey stock (POSKX) is the preferred replacement for PRiMeCaP Core. Both can be purchased directly at www.OdysseyFunds.com or for a fee through Vanguard Brokerage. With high-Yield Corporate closed, use Fidelity High Income (SPHIX).

MODEL PORTFOL IOS

The alternative Funds in the table to the left are for both current and past recommendations I’ve made for Vanguard funds that either closed or were saddled with high minimums. Some of these funds have subsequently closed, but many of you own them, so I’ve provided this performance data for your interest. Note that HGHAX is typically sold with a front-end load, though clients of private money managers can sometimes buy the fund no-load. Please refer to the note above for my current alternative recommendations.

PAST ALTERNATIVES TO CLOSED/HIGH MINIMUM FUNDS

Fund Ticker8/30

Priceaug.

ReturnYTD

Return12-Mo. Return

3-Year Return

5-Year Return alternative For

Artisan MidCap ARTMX $44.94 -1.5% 19.7% 22.8% 21.7% 11.6% Capital Opp.Artisan MidCap Value ARTQX $25.23 -2.7% 21.4% 27.7% 19.7% 10.2% Selected ValuePolaris Global Value PGVFX $18.03 -1.9% 18.4% 26.6% 17.6% 7.2% Global EquityFidelity International SmallCap FISMX $23.90 -0.0% 17.4% 29.2% 14.2% 6.9% International Expl.Fidelity International SmallCap Opp. FSCOX $12.41 -1.9% 9.6% 20.5% 14.6% 3.2% International Expl.T. Rowe International Discovery PRIDX $50.11 -1.2% 8.7% 19.7% 12.6% 6.8% International Expl.Hartford Healthcare HGHAX $26.00 -2.0% 28.4% 32.0% 24.3% 10.3% Health CareICON Healthcare ICHCX $21.45 -2.0% 24.1% 26.8% 23.0% 9.4% Health CarePRIMECAP Odyssey Growth POGRX $21.83 -1.4% 25.9% 29.2% 21.2% 10.8% PRIMECAPPRIMECAP Odyssey Aggressive Growth POAGX $26.44 -0.1% 35.7% 38.0% 27.0% 17.0% Capital Opp.PRIMECAP Odyssey Stock POSKX $19.10 -1.9% 19.5% 24.1% 18.3% 8.5% PRIMECAP CoreFidelity High Income SPHIX $9.19 -0.8% 2.0% 5.9% 8.9% 9.7% High-Yield Corporate

GROWTH MODELTicker shares naV Value % Mo. Return

Selected Value VASVX 5,738 $25.81 $148,108 23% -1.8%S&P MidCap 400 Growth ETF IVOG 1,762 $80.92 $142,549 23% -4.3%Dividend Growth VDIGX 6,800 $19.26 $130,977 21% -2.6%Capital Opportunity VHCOX 2,805 $42.25 $118,531 19% -2.1%Health Care VGHCX 224 $173.71 $38,868 6% -2.1%Short-Term Inv.-Grade VFSTX 2,251 $10.65 $23,970 4% NAInternational Growth VWIGX 1,129 $20.42 $23,060 4% -1.8%TOTAL $626,064

PAST PERFORMANCE

2012: 14.3% 2001: -6.4%2011: -1.4% 2000: 20.4%2010: 14.3% 1999: 36.3%2009: 34.4% 1998: 23.5%2008: -38.4% 1997: 23.2%2007: 10.0% 1996: 16.6%2006: 18.4% 1995 26.1%2005: 11.4% 1994: -0.2%2004: 15.7% 1993: 16.6%2003: 32.0% 1992: 6.1%2002: -17.8% 1991: 28.9%

CURRENT PERFORMANCE

aug. -2.6% YTD 18.0% 1-yr 23.1% 3-yr 17.0% 5-yr 7.4%Risk last 24 months 0.96 Risk since inception 0.97

Beg. Value: $50,000 (1/1/91)

CONSERVATIVE GROWTH MODELTicker shares naV Value % Mo. Return

Dividend Growth VDIGX 5,103 $19.26 $98,275 22% -2.6%Capital Opportunity VHCOX 2,127 $42.25 $89,877 20% -2.1%S&P MidCap 400 ETF IVOO 827 $79.69 $65,906 15% -3.8%Selected Value VASVX 2,304 $25.81 $59,470 14% -1.8%High-Yield Corporate VWEHX 6,543 $5.90 $38,601 9% -1.0%Short-Term Inv.-Grade VFSTX 2,823 $10.65 $30,064 7% NAInternational Growth VWIGX 1,446 $20.42 $29,529 7% -1.8%Health Care VGHCX 160 $173.71 $27,781 6% -2.1%TOTAL $439,504

PAST PERFORMANCE

2012: 13.8% 2001: -3.5%2011: 1.0% 2000: 14.0%2010: 12.0% 1999: 19.7%2009: 29.1% 1998: 15.2%2008: -33.6% 1997: 22.6%2007: 8.6% 1996: 17.6%2006: 15.8% 1995 21.5%2005: 8.8% 1994: 1.1%2004: 13.0% 1993: 14.9%2003: 28.9% 1992: 6.5%2002: -16.4% 1991: 26.0%CURRENT

PERFORMANCEaug. -2.2% YTD 15.6% 1-yr 20.7% 3-yr 15.8% 5-yr 7.2%Risk last 24 months 0.86 Risk since inception 0.83

Beg. Value: $50,000 (1/1/91)

INCOME MODELTicker shares naV Value % Mo. Return

Dividend Growth VDIGX 4,065 $19.26 $78,294 24% -2.6%Int-Term Investment-Grade VFICX 6,943 $9.71 $67,421 21% -1.0%PRIMECAP Core VPCCX 3,705 $17.89 $66,275 20% -1.8%High-Yield Corporate VWEHX 6,112 $5.90 $36,062 11% -1.0%Short-Term Inv.-Grade VFSTX 2,637 $10.65 $28,086 9% NAHealth Care VGHCX 105 $173.71 $18,299 6% -2.1%MidCap Index VIMSX 665 $26.72 $17,760 5% -2.5%International Growth VWIGX 592 $20.42 $12,090 4% -1.8%TOTAL $324,287

PAST PERFORMANCE

2012: 11.5% 2001: -1.1%2011: 5.1% 2000: -3.5%2010: 11.2% 1999: 9.9%2009: 21.9% 1998: 18.2%2008: -24.1% 1997: 22.5%2007: 3.8% 1996: 18.4%2006: 10.6% 1995 28.4%2005: 6.2% 1994: -1.2%2004: 8.4% 1993: 10.8%2003: 19.1% 1992: 6.3%2002: -4.5% 1991: 22.4%CURRENT

PERFORMANCEaug. -1.7% YTD 8.8% 1-yr 11.9% 3-yr 11.8% 5-yr 6.8%Risk last 24 months 0.57 Risk since inception 0.61

Beg. Value: $50,000 (1/1/91)

GROWTH INDEX MODELTicker shares naV Value % Mo. Return

S&P MidCap 400 Growth ETF IVOG 904 $80.92 $73,115 28% -4.3%MidCap Value ETF VOE 853 $70.42 $60,097 23% -2.9%Dividend Appreciation ETF VIG 786 $67.29 $52,891 20% -3.6%S&P 500 Growth ETF VOOG 485 $77.27 $37,475 14% -2.5%Health Care ETF VHT 189 $89.85 $16,974 7% -3.4%Short-Term Corporate ETF VCSH 133 $78.93 $10,518 4% -0.2%Total International Stock ETF VXUS 201 $47.07 $9,458 4% -1.5%TOTAL $260,528

CURRENT PERFORMANCE

aug. 3.3% YTD 14.9% 1-yr 19.1% 3-yr 16.9% 5-yr 7.0%Risk last 24 months 1.02 Risk since inception 1.04

Beg. Value: $50,000 (3/1/95)

PAST PERFORMANCE

2012: 14.8% 2003: 28.2%2011: -0.3% 2002: -16.9%2010: 18.8% 2001: -2.4%2009: 33.2% 2000: -15.6%2008: -40.3% 1999: 21.4%2007: 11.7% 1998: 26.7%2006: 16.0% 1997: 25.8%2005: 12.1% 1996: 19.9%2004: 15.1%

The Independent Adviser for Vanguard Investors • September 2013 • 3FOR CUSTOMER SERVICE, PlEASE CAll 800-211-7641

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I StrIve to be a dISCIplIned inves-tor, and when I buy a mutual fund, I expect to be invested in it for years. however, not every decision is going to play out as I expect, and to be a successful investor (and a valuable resource to you), I need to be honest and flexible enough to admit when that has happened, and move on. this is the situation I find myself in with GNMA.

let’s go back to november 2012, when I first recommended sell-ing Short-Term Investment-Grade to purchase GnMa in the Model Portfolios. at the time, my thesis behind GnMa was that we could pick up more yield and continue to get good portfolio protection. and while rising interest rates were a concern, GnMa had a duration (a measure of how sen-sitive a bond or bond fund is to interest rates) of 3.4 years and a history of suc-cessfully navigating rising interest rate environments.

how has that thesis played out over the past 10 months or so?

First, GnMa’s yield advantage has shrunk from 1.27% at the time of the trade to only 0.63% through august. In fact, I have learned that yield reporting on GnMa and other mortgage-only funds can be a moving target for some very technical reasons. (I have more on that on page 13.)

GnMa’s duration has also extended out to 5.8 years, and is now on par with Total Bond Market on this measure. though its duration is now longer, GnMa is yielding less (according to

vanguard’s reporting) than it was when we made the trade.

now, what about navigating a rising rate environment? May through June was a test, as the 10-year treasury’s yield went from 1.67% to 2.48%. GnMa lost 3.4% in May and June, slightly worse than total bond Market’s 3.3% decline and nearly three times greater than Short-term Investment-Grade’s 1.3% loss. did I expect GnMa to deliver positive returns in that environment? of course not. but I was looking for it to hold up better than it did.

as John Maynard keynes is said to have responded to an inquiry from a critic, “When the facts change, I change my mind. What do you do, sir?”

GnMa remains a well-managed, high quality fund, but my thesis has not played out and I don’t believe the future portends better things for the fund. that isn’t to say that it’s been a disaster owning GnMa. the fund only lost 3.2% from the end of october 2012 through the end of august. that’s a whole lot better than Long-Term Treasury’s 11.2% loss, for example, but even Intermediate-Term Treasury lost 3.2%.

So yes, there was an opportunity cost. It wasn’t much, but it was some-thing. our positions in GnMa ranged from 5% to 10% in the three Model Portfolios that held the fund. over the 10 months we owned it, Short-term Investment-Grade lost 0.5%. So had we not made the trade, our performance would have been better by between

0.16% and 0.31%—hardly something to lose sleep over, but quantifiable nonetheless.

With that in mind, on Friday, aug. 30 we cut our losses and traded our positions in GnMa held in three of our Model Portfolios into Short-term Investment-Grade. no trade was

required in the Growth Index Model, where we stuck with Short-Term Corporate ETF. (Investors in the high-est income tax brackets looking to cut their taxable income by as much as possible can earn a taxable-equivalent yield in Limited-Term Tax-Exempt.)

For those investors in taxable accounts, there is one silver lining to this trade: the realization of a loss, which can be used to offset gains and reduce future tax bills. It isn’t much, but it’s something.

While our foray into GnMa didn’t go as planned, if we step back and consider the Model Portfolios as a whole, rather than focus on any one position, they are generating strong returns. despite this misstep, my philosophy of “buying the manager, not the fund” will continue to serve us well in the years ahead. n

TRADE

When the Facts Change

As John Maynard Keynes is said to have responded to an inquiry from a critic, “When the facts change, I change my mind. What do you do, sir?”


While profit growth defines growth stocks, it’s a different story for growth funds. In my book, a growth fund is one where the emphasis is on capital appre-ciation, not generating income. Some fund managers aim to accomplish this by searching for companies where prof-its are growing rapidly. other managers look for companies whose assets are so undervalued that market recognition of that value will generate great price appreciation. Some commentators split this between growth and value invest-ing, but to my way of thinking they are two sides of the same coin.

Consider the duo at Capital Value, for instance: they may use a value investor’s orientation in building their portfolio, but the fund is definitely a “growth” fund, with a yield well below the market’s.

What I’m looking for in a growth fund is the ability to power a portfolio by producing long-term gains that can be banked five, 10, 20 or even 40 years into the future.

Opportunity RemainsWhy I do see opportunity in large

growth funds? valuations and sentiment. large growth funds may not be as

attractive as they were in late 2008 and early 2009, but after a greater than 150% run for the stock market, nothing is as cheap as it was back in the throes of the bear market.

For instance, look at the price-to-earnings (p-e) ratio, or the amount an investor pays for each dollar of earn-ings, for Growth Index’s portfolio, a proxy for large growth funds: at 22.3, Growth Index’s p-e ratio is close to twice as high as the 13.1 it traded for at the end of 2008. Still, I don’t think that’s super expensive. over the past 18 years or so, the average p-e for Growth Index has been 25.9, a number which includes the tech boom, when p-e’s jumped above 50—an unsustain-able and unprecedented level. If I look over the past 10 years as a more nor-mal period, the average p-e ratio drops to 21.3. So large growth stocks are not on sale, but they also don’t appear

to be pushing the outer bounds of the envelope.

how do large growth stocks com-pare to the rest of the market? the chart above looks at the p-e ratios of Growth Index and Total Stock Market. again, based strictly on earnings, prices are reasonable, with p-e’s relative to the stock market slightly below their long-term average.

When it comes to sentiment, I look for areas of the market that investors have piled into and those they may be neglecting. When everyone agrees that growth stocks are the place to be, then the party may be over for that asset class (or strategy). you have to wonder, who is left to buy? opportunity lies in finding pockets of the market that investors are avoiding. It’s safe to say investors have not shown large growth funds much love these past few years, despite being relatively cheap and only recently posting strong returns.

the strongest signal investors can give is by voting with their feet—or rath-er, their wallets. and every single one of vanguard’s actively managed large-cap growth funds has seen more money exit than come in (on a monthly basis) since the market bottom in February 2009. Some of these outflows are deserved, as a number of these funds are multi-managed messes—more on this below.

another piece of the story is that one of the best funds in the space, PRIMECAP, is closed to new inves-tors. yes, being closed keeps it from growing too large, but since the end of February 2009, shareholders have pulled nearly $8 billion out of the fund,

which hasn’t had a single month of positive net flows since June 2009. (In spite of the outflows, at $35 billion in size, it’s about 75% larger than it was in March 2009.) For a fund run by some of the best stock pickers in the business, and in the midst of a major bull mar-ket, the fact that money is flowing out rather than in is shocking—even if it is closed. (Maybe investors are following my advice and buying the private-label prIMeCap odyssey funds instead?)

Growth Index has gathered about $6 billion in new money since February 2009, so some investors have found their way into the space. but consider that over the same period, investors added $75 billion or so to Total Bond Market, about $63 billion to Total International Stock, and roughly $42 billion to Emerging Markets Stock Index.

at best, I can say that investors have neglected large-cap growth funds, and this creates opportunity.

Expectations Checkat the outset, I said investors need to

check their expectations at the door. the last few years have been very strong for large-cap growth funds. the chart below shows rolling three-year returns going back to the late 1980s for the old-est of vanguard’s options. over the past three years, these funds have returned nearly 20% a year. as the chart shows, returns of that level are not unprec-edented, but they are also not sustain-able. Compounding your wealth at 20% a year over the course of a career would put you in the pantheon of investing legends alongside Warren buffett. Most

FOCUS FROM PAGE 1>

Growth Stocks are Fairly Priced

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Morgan GrowthPRIMECAPU.S. Growth500 Index


of the managers tapped by vanguard to run its funds are far from legendary, and even if they were, their funds are likely to be held back by the multimanager approach that most are encumbered by.

prIMeCap Management comes closest to this level of success over the very long term by returning 13.3% a year since prIMeCap’s launch in november 1984. through July, the fund has outper-formed 500 Index by 2.5% a year. (and that 2.5% a year really compounds over time.) do I expect the prIMeCap team to continue to generate market-beating returns and drive growth of your and my money? absolutely. but the odds of maintaining a 20%-return-a-year pace from current stock market levels are against them (and everyone else).

keep in mind that, as I discussed last month, even if the stock market just holds steady at this level between now and next February, the five-year return numbers are going to start look-ing equally juicy. this doesn’t mean we can’t generate decent returns going forward, but beware of extrapolating the past into the future.

So, how are vanguard investors like us playing large-cap growth funds?

longtime readers know (and you’ve probably already picked up) that, with-out a doubt, the best growth manag-er at vanguard, large or small, is the prIMeCap Management team. I’ll get into its individual funds in a moment, but the other half of the story is that vanguard has picked some real losers among growth managers, and where it may have found some good managers, they are buried in multimanaged funds.

With a handful of etFs in the mix, only about half of the large-cap growth funds in the vanguard stable are actively managed, and only the prIMeCap-run funds have a single outside adviser for the portfolio. let’s take a closer look at what vanguard has to offer in the space.

Growth EquitySell. over the long haul, this fund’s

performance suffers mightily from the missteps of its original manager. turner Investments, a firm whose principals never saw a growth stock they didn’t like, has been gone for nearly five years

now. unfortunately, the two replace-ment sub-advisers can’t seem to beat or even match their benchmark, the russell 1000 Growth Index, though they’ve come close.

baillie Gifford took over a portion of the fund in april 2008, and when turner was fired in January 2009, the portfolio was divided in half between baillie Gifford and a new manager, Jennison associates. as with all management changes, the hope was to breathe new life into this fund. From the end of January 2009 through august 2013, the fund has gained 121.7%, or 19.0% a year, which, on its face, isn’t shabby. but the bogey has gained 130.3%, or 20.0% a year. Growth Index has com-pounded at 19.6% per year over the period. I will give the managers credit for keeping pace with their vanguard growth fund peers over that period. So there has been some improvement under the new sub-advisers, but the case still is not convincing. (and, by the way, the vanguard board seems to agree with me—not one director owns a share here.)

Growth Index; S&P 500 Growth ETF; Russell 1000 Growth ETF; Mega Cap Growth ETF

Buy Growth Index, S&P 500 Growth ETF and MegaCap Growth ETF. Hold Russell 1000 Growth ETF.

I don’t blame investors who feel overwhelmed by the investment choices they face. vanguard isn’t making it any easier on them by offering four large-cap growth index funds (or etFs).

Maybe performance can help us sep-

arate these funds? vanguard brought the S&p and russell-based etFs to market nearly three years ago, in September 2010. From the end of September 2010 through august 2013, performance has been remarkably similar among these funds, with gains ranging from S&P 500 Growth ETF’s 52.4% to Growth Index’s 52.9%. at least over this live track record, we can’t glean too much from performance.

Growth Index and MegaCap Growth ETF recently saw their under-lying bogey change from MSCI to CrSp indexes. I’ve said before that I don’t see this as a cause for concern. and despite this change, Growth Index remains a tough hurdle to surpass.

an investor might be drawn to MegaCap Growth etF, since it at least sounds distinct from the others. however, as the table on page 6 shows, S&p 500 Growth etF is also “mega cap,” since its median company is $74.0 billion in size, which is roughly equal to MegaCap Growth’s $79.7 billion median. and despite the implied dif-ference in company size, there has not been a distinction in performance over the past several years.

the table also indicates that the port-folios of all four index funds look awful-ly similar. technology and consumer-related companies make up about half of the portfolios, while telecom and utility companies barely make the cut. apple is the top holding across the board.

When it comes down to it, I lean toward S&p 500 Growth etF, and I hold it in the Growth Index Model Portfolio. S&p is more selective when construct-ing its indexes, and this tends to result in holding higher-quality companies. the companies in this etF are also cheaper and somewhat larger than peers. I also like the fact that the S&p option devotes more of its portfolio to health care stocks than its siblings. For my money I prefer to partner with the team from prIMeCap management, but the S&p 500 Growth etF will do in a pinch.

Morgan GrowthHold. at what point does an active

fund become an index fund?vanguard has managed to keep

Growth Equity Not Reborn Yet

7/93

7/95

7/97

7/99

7/01

7/03

7/05

7/07

7/09

7/11

7/13

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30 rising line = Fund outperforms Russell 1000 Growth index

April 2008 - Baillie Gifford given a portion of fund portfolio▼

▼Turner fired, Jennison Associates handed 50% of fund

>


from hiring or firing anyone here for nearly five years, but with five different firms sub-advising Morgan Growth, what you get is a middle-of-the-road, no-conviction mid- to large-cap growth stock amalgam. With five firms stirring the pot, no one can do too much dam-age on their own—but they can’t really drive performance higher, either.

though its low expenses make it an able competitor in the broad mutual fund universe, the fund has continued to lag its russell 3000 Growth Index benchmark since the three newest man-agers were hired—Jennison associates in January 2007, and kalmar and Frontier Capital in november 2008.

the fund is neither low-risk nor high-return. during the 2007 to 2009 market tumble, it hit a new MCl of -50.3%, compared to -52.8% for Growth Index. however, during the same period PRIMECAP’s worst drawdown was -44.3% and PRIMECAP Core’s was -43.0%.

even former vanguard chairman Jack bogle, years ago, said that Morgan Growth is “an average fund. It’s not a star.” If I’m not buying a star, why not just buy the index, keep costs low and accept that I’ll get average performance?

PRIMECAPBuy. as I mentioned above, the

prIMeCap Management team has delivered market-beating returns over a very long stretch of time. how do they do it?

as with all of prIMeCap Manage-ment’s funds, this one is a growth-at-a-reasonable-price, or Garp, fund. the managers look for companies with the potential for strong earnings growth, but which are currently selling for less than comparable growth companies—most likely because there’s some negative fac-tor influencing most investors’ percep-tion of the company’s value. each of the five managers is responsible for manag-ing a sleeve of the fund. the end result of this approach is a high-conviction portfo-lio with 131 stocks and over one-third of the assets in the 10 largest holdings. the fund does hold some mid-caps, though by dint of its size, large-caps play a pre-dominant role in the portfolio.

While the long-term track record is impressive, keep in mind that prIMeCap does not beat the market month in and month out. In fact, since the fund’s inception, it has only outper-formed 500 Index, vanguard’s flagship S&p index fund, 56% of the time on a

monthly basis. but when prIMeCap outperforms, it more than makes up for the times it lags, by a large margin.

While this fund is closed to new investors, its near-clone, PRIMECAP Odyssey Growth (poGrX), is wide open and, because of its smaller size, is nimbler and has substantially out-performed this granddaddy since its introduction in november 2004. through august 2013, the new fund is up 126.7% versus 104.6% for gramps.

vanguard offers the odyssey funds through its brokerage service, and as I have long recommended, unless taxes you’ll pay selling your vanguard hold-ings are a concern, you have no excuse for sticking with the original, which is still great, but not as great. at a minimum, I’d take any distributions prIMeCap makes and invest them in the odyssey fund.

PRIMECAP CoreBuy. the youngest prIMeCap-run

fund at vanguard is also closed to new investors. too bad. this slightly less-growthy version of prIMeCap has a lot going for it, including a smaller asset base compared to its big brothers.

this is the only prIMeCap-run fund at vanguard that’s outperformed its odyssey sibling, mainly because it has a lower expense ratio. prIMeCap Core and PRIMECAP Odyssey Stock (poSkX) were launched at virtually the same time and are very, very simi-lar, so that expense difference is key. Since inception in december 2004, prIMeCap Core has outperformed prIMeCap by a narrow margin, 103.1% versus 93.9%

as I said, with less of a “growth” tilt, this is more of a “core” fund than prIMeCap or odyssey Growth, and hence it is also the least risky of the prIMeCap Management-run funds. It is a well-run fund, but if you can toler-ate a bit more risk, you may be able to reap higher returns in odyssey Growth.

Social IndexBuy. like Growth Index, Social

Index is a large-cap growth fund with a portfolio of brand-name stocks, including Johnson & Johnson, Google

>

growth index Funds growth idx. s&P 500 gro. eTF Russell 1000 gro. eTF MegaCap gro. idx.

7/31/2013 7/31/2013 7/31/2013 7/31/2013Number of stocks 341 296 612 138P/E 22.3 19.0 21.6 20.5P/Book 4.1 3.5 4.7 4.2Med. Mkt. Cap-$ billions $51.2 $74.0 $50.3 $79.7Expense Ratio 0.24% / 0.10%* 0.15% 0.15% 0.12%Top sector allocationsTechnology 26.1% 26.6% 21.7% 29.2%Consumer Services 20.9% 17.6% 22.7% 21.4%Financials 12.0% 9.5% 8.1% 11.5%Industrials 11.5% 7.9% 12.4% 8.9%Consumer Goods 10.6% 10.8% 11.1% 10.3%Health Care 9.3% 16.7% 12.0% 8.9%Top-10 25% 25% 21% 32%1 Apple Apple Apple Apple2 Google Google Microsoft Google3 IBM Exxon Mobil Google IBM4 Coca-Cola Bank of America IBM Coca-Cola5 Philip Morris Coca-Cola Coca-Cola Philip Morris 6 Comcast Philip Morris Philip Morris Comcast7 Intel Merck Verizon Intel8 Home Depot Johnson & Johnson PepsiCo Home Depot9 Oracle Microsoft Home Depot Oracle10 QUAlCOMM PepsiCo Oracle QUAlCOMM*Investor shares and ETF shares. Admiral shares are also 0.10%. Also, Vanguard’s Russell and CRSP indexes use different definitions for the “sectors” their indexes are allocated to, so comparisons are approximate.


and pepsi. In its early years, the fund tracked a Calvert index, but it switched to a FtSe benchmark in late 2005.

over time, Social Index and Growth Index have traded the lead in the perfor-mance derby. For the past several years, the performance of financials, 27.7% of Social Index’s portfolio versus 12.0% for Growth Index, has dictated which led the way. For instance, Social Index was the tortoise to Growth Index’s hare from late 2006 through the end of the bear market in March 2009 as its comparatively higher allocation to financials hurt—a lot.

If you believe that investing in Social Index will make the world better—or make you feel better—or that over time companies screened for attractive social characteristics will win out, then by all means, buy it. (I’m a skeptic on all three and believe that you should first invest to profit, and then support orga-nizations whose missions match your own social goals.) plus, will you really sleep well knowing that large financial companies like JpMorgan Chase, Wells Fargo and bank of america are all in Social Index’s top 10, and will probably stay there unless they go bankrupt? I wouldn’t.

STAR LifeStrategy GrowthSell. vanguard continues to tinker

with the allocations here. In fall 2010 the fund picked up a greater allocation to foreign stocks. about a year later in 2011, asset allocation (which was merged away into Balanced Index) was dropped from the mix. and just several months ago the fund picked up a small allocation to Total International Bond.

today its holdings are divided among four index funds: Total Stock Market (56% of assets), Total International Stock (24%), Total Bond Market II (a clone of Total Bond Market, 16%) and total International bond (4%). For those counting, that’s 80% in stock funds and 20% in bond funds.

I think investors can do better follow-ing one of my Model Portfolios and mak-ing strategic changes to their holdings rather than watching the grass grow under their feet or letting vanguard make the changes when it opens a new fund. My

Conservative Growth Model Portfolio allocates a little more than 80% of assets to stocks and has beaten the pants off of this option since inception through august, up 461.5% versus 318.5%. the Growth Model Portfolio has almost dou-bled this fund’s return since inception. don’t bother investing here.

Admiral Tax-Managed Capital Appreciation

Sell. In a few words, this is a good concept, but one that appears outdated.

this index fund aims to track the russell 1000 index while minimizing taxes. vanguard’s indexing group buys a selection of the russell index’s stocks (about 650 of them) that pay little or no dividends while still trying to mimic the overall index in terms of industry alloca-tion, market capitalization and the like.

there’s absolutely nothing wrong with trying to minimize taxes. but with the introduction of the russell 1000 etF—which by its nature should be highly tax-efficient—what’s the real value here? Why do the minimums remain so high ($10,000 versus $3,000

for most funds)? Why not just invest in an already tax-efficient etF or index fund? don’t let the tax tail wag the investment dog, or let a tax-saving name blind you to the other options available at lower minimums.

U.S. GrowthSell. Will this fund ever be a buy

again? I’ve got my fingers crossed, but they’re probably going to stay that way for a long, long time. u.S. Growth appears to have stabilized after vanguard finally fired alliancebernstein in fall 2010. It’s been nearly three years since delaware Investments and Wellington Management joined existing manag-er William blair & Co on the fund, and since then performance has about matched indexes and sibling funds.

Staying afloat is better than sink-ing, but it is not enough to convince me to put my dollars here. It’s a shame this fund can’t be juiced up, because vanguard could use a good, well-man-aged large-cap growth fund that’s open to new shareholders. as it stands, this one doesn’t fit that bill. n

active Large-Cap growth Fundsgrowth equity Morgan growth PRiMeCaP PRiMeCaP Core U.s. growth

7/31/2013 7/31/2013 7/31/2013 7/31/2013 7/31/2013# of stocks 83 334 131 145 118P/E 24.0 22.1 20 20.6 24.9P/Book 3.5 3.6 3.4 3.2 4.0Med. Mkt. Cap. $33.6 $35.2 $51.8 $51.8 $39.1Foreign 5.4% 2.9% 11.2% 13.1% 3.4%Cash 2.8% 1.9% 4.2% 5.3% 0.7%sector allocationConsumer Disc. 15.7% 19.6% 8.8% 10.7% 23.2%Consumer Staples 9.1% 7.2% 0.7% 1.6% 6.3%Energy 6.4% 4.4% 4.2% 3.4% 6.1%Financials 15.4% 5.4% 5.4% 8.0% 7.5%Health Care 18.8% 16.2% 33.2% 30.7% 12.5%Industrials 8.8% 12.8% 13.9% 14.4% 5.9%Info Tech 22.5% 29.9% 31.0% 26.1% 33.7%Materials 2.6% 3.2% 2.7% 4.5% 2.6%Telecom 0.7% 1.3% 0.0% 0.0% 2.2%Utilities 0.0% 0.0% 0.1% 0.6% 0.0%Top-10 23% 17% 41% 33% 27%1 Google Cisco Systems Biogen Idec Amgen Google2 eBay Google Amgen Roche Mastercard3 Berkshire Hathaway Apple Google Biogen Idec Visa4 US Bancorp Microsoft Roche Eli lilly priceline.com5 Progressive Gilead Sciences Eli lilly Google Apple6 Johnson & Johnson Home Depot Texas Instruments Marsh & Mclennan eBay7 First Republic Bank Costco Wholesale FedEx Johnson & Johnson EOG Resources8 Apple Amgen Microsoft Novartis Allergan9 Monsanto Wal-Mart Adobe Systems Texas Instruments QUAlCOMM10 Pfizer TJX Novartis Medtronic Celgene


PERFORMANCE REV IEW

VANGUARD EQUITY FUNDS

Fund (fund #) Ticker Minimum Loads advice8/30

Priceaug.

ReturnYTD

Return12-Mo. Return

3-Year Return

5-Year Return

12-Mo. Yield Risk

SECTOREnergy (51) VGENX $3K — Hold $64.05 -0.4% 8.4% 10.4% 12.3% 0.5% 2.2% 1.70Precious Metals & Mining (53) VGPMX $3K — Sell $11.02 4.5% -30.9% -25.9% -13.5% -11.2% 3.6% 2.42Health Care (52) VGHCX $3K — Buy $173.71 -2.1% 24.3% 28.8% 21.6% 11.6% 1.5% 0.77REIT Index (123) VGSIX $3K — Hold $21.45 -6.9% -0.2% 0.4% 12.6% 5.5% 3.7% 1.41Global ex-U.S. Real Estate Index (738) VGXRX $3K 0.25%f/0.25%r Hold $21.00 -2.5% -3.2% 12.2% — — 5.9% 1.59 AGGRESSIVE GROWTHCapital Opportunity (111) VHCOX $3K — Buy $42.25 -2.1% 25.7% 33.7% 20.5% 8.7% 0.9% 1.16Explorer (24) VEXPX $3K — Hold $98.93 -1.7% 24.5% 30.8% 22.1% 9.6% 0.3% 1.36Explorer Value (1690) VEVFX $3K — Hold $29.39 -3.4% 20.2% 29.2% 21.6% — 1.0% 1.27MidCap Growth (301) VMGRX $3K — Sell $24.14 -2.3% 18.5% 21.4% 20.5% 9.8% 0.3% 1.16SmallCap Growth Index (861) VISGX $3K — Buy $30.27 -1.9% 20.9% 26.5% 23.0% 10.3% 0.7% 1.40SmallCap Index (48) NAESX $3K — Hold $46.36 -3.2% 19.7% 26.3% 21.1% 9.7% 1.4% 1.34SmallCap Value Index (860) VISVX $3K — Hold $20.51 -4.2% 17.9% 25.6% 19.0% 8.8% 2.1% 1.29Strategic Equity (114) VSEQX $3K — Hold $25.86 -3.6% 20.6% 26.9% 22.4% 8.3% 1.4% 1.36Strategic SmallCap Equity (615) VSTCX $3K — Hold $26.30 -4.1% 21.1% 27.3% 22.6% 8.7% 1.4% 1.44Admiral Tax-Managed SmallCap (116) VTMSX $10K — Sell $37.68 -2.5% 21.0% 26.3% 22.5% 9.4% 1.3% 1.28 GROWTHCapital Value (328) VCVlX $3K — Buy $13.82 -3.6% 24.6% 35.8% 19.1% 12.6% 1.4% 1.53Extended Market Index (98) VEXMX $3K — Sell $55.09 -2.8% 20.2% 26.9% 20.7% 9.3% 1.3% 1.32Growth Equity (544) VGEQX $3K — Sell $14.24 -1.5% 16.0% 17.4% 18.1% 6.2% 0.9% 1.08Growth Index (9) VIGRX $3K — Buy $41.69 -1.7% 14.4% 15.4% 19.0% 7.9% 1.3% 1.08MidCap Growth Index (832) VMGIX $3K — Buy $31.83 -2.0% 17.9% 22.9% 19.3% 7.8% 0.5% 1.32MidCap Index (859) VIMSX $3K — Buy $26.72 -2.5% 18.9% 24.8% 19.2% 9.0% 1.1% 1.21MidCap Value Index (835) VMVIX $3K — Hold $27.69 -2.9% 19.6% 26.3% 18.8% 9.8% 1.5% 1.13Morgan Growth (26) VMRGX $3K — Hold $23.17 -2.0% 16.4% 17.5% 18.1% 6.8% 0.9% 1.19PRIMECAP (59) (CLoseD) VPMCX — — Buy $83.66 -1.7% 20.4% 25.4% 18.2% 7.7% 1.1% 1.05PRIMECAP Core (1220) (CLoseD) VPCCX — — Buy $17.89 -1.8% 19.8% 24.9% 18.6% 8.9% 1.4% 0.99Selected Value (934) VASVX $3K — Buy $25.81 -1.8% 23.0% 29.3% 20.2% 11.2% 1.7% 1.07Social Index (213) VFTSX $3K — Buy $10.28 -3.1% 19.7% 25.9% 19.4% 7.3% 1.4% 1.06STAR Growth (122) VASGX $3K — Sell $25.20 -2.1% 9.3% 13.7% 12.6% 5.2% 2.5% 0.89Admiral Tax-Mgd. Capital App. (5102) VTClX $10K — Sell $83.02 -2.8% 16.7% 19.9% 18.8% 7.6% 1.7% 1.05U.S. Growth (23) VWUSX $3K — Sell $24.67 -1.2% 16.0% 19.3% 19.3% 7.3% 0.5% 1.22 GROWTH & INCOME500 Index (40) VFINX $3K — Buy $151.04 -2.9% 16.0% 18.5% 18.2% 7.2% 1.9% 1.00Convertible Securities (82) VCVSX $3K — Buy $13.97 -1.5% 11.5% 16.4% 11.3% 8.0% 2.9% 0.77Diversified Equity (608) VDEQX $3K — Sell $27.26 -2.5% 18.2% 22.5% 19.4% 8.0% 1.3% 1.14Dividend Appreciation Index (602) VDAIX $3K — Buy $26.93 -3.5% 14.1% 16.9% 16.6% 7.8% 2.1% 0.88Dividend Growth (57) VDIGX $3K — Buy $19.26 -2.6% 16.9% 18.4% 18.1% 8.4% 1.9% 0.78Equity Income (65) VEIPX $3K — Buy $27.68 -3.6% 16.2% 18.9% 19.5% 8.9% 2.6% 0.85Growth & Income (93) VQNPX $3K — Sell $35.00 -3.2% 16.4% 18.9% 18.9% 6.4% 1.8% 1.03High Dividend Yield Index (623) VHDYX $3K — Buy $22.41 -3.9% 16.3% 17.9% 19.2% 8.2% 2.9% 0.82largeCap Index (307) VlACX $3K — Buy $30.35 -2.8% 16.3% 19.1% 18.4% 7.4% 1.8% 1.02Market Neutral (634) VMNFX $250K — Sell $10.50 -1.3% 3.4% 1.6% 2.9% -1.9% 0.5% 0.26STAR Moderate Growth (914) VSMGX $3K — Sell $21.61 -1.7% 6.2% 9.5% 10.2% 5.3% 2.4% 0.67Admiral Tax-Mgd. Growth & Income (5101) VTGlX $10K — Sell $73.45 -2.9% 16.1% 18.6% 18.3% 7.2% 2.0% 1.00Total Stock Market Index (85) VTSMX $3K — Hold $41.30 -2.8% 16.9% 20.1% 18.8% 7.7% 1.8% 1.05U.S. Value (124) VUVlX $3K — Hold $14.06 -4.2% 18.5% 24.4% 20.3% 6.7% 2.1% 1.10Value Index (6) VIVAX $3K — Hold $26.79 -3.6% 18.1% 22.8% 17.6% 6.8% 2.3% 1.00Windsor (22) VWNDX $3K — Hold $18.05 -3.0% 20.0% 28.2% 19.7% 8.7% 1.4% 1.16Windsor II (73) VWNFX $3K — Buy $33.87 -3.1% 16.5% 20.7% 18.6% 7.4% 2.1% 1.00 BALANCEDBalanced Index (2) VBINX $3K — Hold $25.59 -2.0% 8.6% 10.5% 12.3% 7.0% 1.9% 0.62Mgd. Payout Growth (1497) VPGFX $25K — — $19.87 -2.1% 8.7% 11.8% 12.2% 5.4% 2.5% 0.97Mgd. Payout Growth & Distrib. (1498) VPGDX $25K — — $18.24 -1.8% 6.7% 8.9% 10.8% 5.4% 4.5% 0.81Mgd. Payout Distribution Focus (1499) VPDFX $25K — — $14.95 -1.6% 5.6% 7.2% 9.7% 5.3% 7.5% 0.70STAR (56) VGSTX $1K — Hold $22.20 -1.6% 7.5% 11.8% 11.5% 6.8% 2.0% 0.74STAR Conservative Growth (724) VSCGX $3K — Sell $17.33 -1.4% 3.1% 5.3% 7.4% 4.8% 2.3% 0.46STAR Income (723) VASIX $3K — Sell $14.10 -1.0% 0.2% 1.3% 4.8% 4.4% 2.1% 0.27Admiral Tax-Managed Balanced (103) VTMFX $10K — Sell $23.29 -1.8% 5.8% 7.9% 10.2% 6.4% 2.2% 0.51Wellesley Income (27) VWINX $3K — Hold $24.60 -1.9% 3.6% 5.2% 9.2% 8.5% 3.0% 0.40Wellington (21) VWElX $3K — Buy $36.78 -2.2% 10.1% 13.3% 12.7% 7.6% 2.6% 0.66 TARGET RETIREMENTTarget Retirement 2060 (1691) VTTSX $1K — — $24.16 -2.3% 10.8% 15.8% — — 1.3% —Target Retirement 2055 (1487) VFFVX $1K — — $27.48 -2.3% 10.8% 15.8% 14.2% — 1.6% 1.00Target Retirement 2050 (699) VFIFX $1K — — $25.58 -2.3% 10.8% 15.8% 14.1% 6.1% 1.9% 1.00Target Retirement 2045 (306) VTIVX $1K — — $16.12 -2.3% 10.8% 15.8% 14.1% 6.1% 2.0% 1.00Target Retirement 2040 (696) VFORX $1K — — $25.68 -2.3% 10.8% 15.8% 14.1% 6.2% 1.9% 1.00Target Retirement 2035 (305) VTTHX $1K — — $15.51 -2.2% 10.1% 14.8% 13.8% 5.9% 2.0% 0.97Target Retirement 2030 (695) VTHRX $1K — — $25.48 -2.0% 9.0% 13.3% 12.9% 5.8% 2.0% 0.89Target Retirement 2025 (304) VTTVX $1K — — $14.65 -1.9% 7.8% 11.7% 12.0% 5.8% 2.0% 0.80Target Retirement 2020 (682) VTWNX $1K — — $25.41 -1.8% 6.6% 10.1% 11.0% 5.8% 2.0% 0.72Target Retirement 2015 (303) VTXVX $1K — — $14.08 -1.6% 5.2% 8.3% 10.0% 5.8% 2.1% 0.63Target Retirement 2010 (681) VTENX $1K — — $24.90 -1.3% 3.2% 5.7% 8.8% 5.6% 2.1% 0.51Target Retirement Income (308) VTINX $1K — — $12.26 -1.1% 1.4% 3.1% 6.8% 5.5% 2.2% 0.37

our ratings: BUY: Best choice. Generally funds held in our Model Portfolios or funds with similar objectives. HOlD: Current prospects for the fund are not as good as those with a Buy rating. However, investors who own shares in the fund may wish to assess tax costs of trading into a Buy-rated fund. SEll: The fund’s long-term prospects are not as compelling as other funds’, or other factors may make the fund unattract-ive compared to alternatives. “+” is a rating upgrade over the previous month; “-” is a downgrade. Investors should weigh all tax implications of fund switches before making a sale or purchase. Some closed funds are available for purchase by high-net-worth investors. All funds charge a $20 annual account fee unless you have $10,000 in the fund, $100,000 with Vanguard or accept all paperwork through online means.


PERFORMANCE REV IEW

VANGUARD EQUITY FUNDS (CONT.)

Fund (fund #) Ticker Minimum Loads advice8/30

Priceaug.

ReturnYTD

Return12-Mo. Return

3-Year Return

5-Year Return

12-Mo. Yield Risk

INTERNATIONAL/GLOBALDeveloped Markets Index (227) VDMIX $3K — Sell $10.46 -1.4% 7.3% 18.6% 9.4% 1.9% 3.2% 1.33Emerging Markets Stock Index (533) VEIEX $3K — Hold $24.07 -3.2% -12.9% -2.0% 0.1% 1.2% 3.7% 1.67Emerging Markets Select Stock (752) VMMSX $3K — Hold $18.03 -2.5% -9.6% 2.5% — — 1.3% 1.68European Index (79) VEURX $3K — Hold $27.43 -1.3% 8.0% 20.2% 10.5% 1.6% 5.0% 1.48Global Equity (129) VHGEX $3K — Buy $20.76 -2.7% 11.2% 19.9% 13.4% 4.0% 1.6% 1.19International Explorer (126) VINEX $3K — Hold $16.58 -0.7% 12.7% 23.3% 9.7% 5.1% 2.4% 1.35International Growth (81) VWIGX $3K — Buy $20.42 -1.8% 6.0% 17.5% 9.9% 3.8% 1.7% 1.51International Value (46) VTRIX $3K — Hold $33.12 -1.5% 6.2% 19.2% 8.5% 1.8% 2.5% 1.38Pacific Index (72) VPACX $3K — Hold $10.68 -1.6% 6.3% 16.2% 7.8% 2.8% 3.8% 1.19Admiral T-M International (127) VTMGX $10K — Sell $11.87 -1.4% 7.5% 18.9% 9.4% 2.0% 4.7% 1.32Total International Stock Index (113) VGTSX $3K — Hold $15.10 -1.6% 2.4% 13.1% 6.9% 1.5% 4.4% 1.38Total World Stock Index (628) VTWSX $3K — Hold $21.55 -2.3% 8.6% 16.1% 11.8% 4.2% 3.1% 1.18World ex-U.S. Index (770) VFWIX $3K — Sell $17.94 -1.7% 1.8% 12.8% 6.9% 1.6% 4.3% 1.39World ex-U.S. SmallCap Index (1684) VFSVX $3K 0.5%f&r Hold $35.26 -1.3% 3.8% 14.7% 7.6% — 3.6% 1.48

Minimum refers to the dollar amount (e.g., $3K means $3,000) needed to open a new taxable account. Loads are denoted with an “f” for front-end and “r” for back-end. Holding periods are noted for loads imposed on sales of shares held less than two months (<2 mo.) or one year (<1). 3-year and 5-year returns are compound, annualized returns. average maturity is in years for bond funds and days for money market funds. 12-month yields are based on trailing 12-month dividend/income distributions. seC yields are reported 30-day yields. Taxable equivalent yields are based on SEC yields. For state funds, taxable equivalent yields incorporate state taxes. Risk is fund vola-tility measured over the previous 24 months. Equity fund risk is measured against the S&P 500 index. Bond fund risk is measured against the Barclays Aggregate Bond index. annuity ratings May differ from taxable funds since choices in the annuity area are more limited. * Tax equivalent yields incorporate the 3.8% health care sur-tax into the 33%, 35% and 39.6% tax rates.** Fund sold with a 0.75% front-end load

VANGUARD VARIABLE ANNUITIES

Fund (fund #) advice8/30

Priceaug.

ReturnYTD

Return12-Mo. Return

3-Year Return

5-Year Return Risk

Money Market Annuity (64) — $1.90 -0.0% -0.1% -0.2% -0.1% 0.1% —Short-Term Inv.-Grade Annuity (144) Buy $17.87 -0.3% -0.4% 0.4% 1.9% 3.7% 0.56Total Bond Market Annuity (67) Hold $34.68 -0.6% -3.1% -3.1% 2.1% 4.5% 1.02High-Yield Bond Annuity (146) Buy $27.18 -1.0% 0.1% 4.1% 8.3% 8.6% 2.24Conservative Allocation Annuity (801) Hold $22.89 -1.4% 2.9% 5.0% — — —Moderate Allocation Annuity (803) Hold $24.17 -1.8% 5.9% 9.2% — — —Balanced Annuity (69) Buy $69.34 -2.3% 9.9% 13.1% 12.4% 7.4% 0.67Capital Growth Annuity (603) Buy $28.55 -1.6% 19.6% 24.7% 18.1% 7.8% 1.03Diversified Value Annuity (145) Buy $23.59 -3.2% 15.6% 18.7% 18.1% 7.4% 0.94Equity Income Annuity (8) Buy $56.67 -3.6% 16.0% 18.6% 19.0% 8.4% 0.85Equity Index Annuity (68) Buy $61.81 -2.9% 15.8% 18.2% 17.9% 6.9% 1.00Growth Annuity (10) Sell $29.87 -1.3% 15.7% 18.7% 18.9% 7.0% 1.21MidCap Index Annuity (143) Buy $36.64 -2.5% 18.6% 24.4% 18.8% 8.7% 1.21REIT Index Annuity (147) Hold $40.24 -6.9% -0.4% 0.0% 12.2% 5.0% 1.41Small Company Growth Annuity (160) Hold $53.25 -1.1% 23.3% 27.5% 23.0% 11.9% 1.35Total Stock Market Annuity (604) Hold $22.85 -2.9% 16.6% 19.7% 18.3% 7.2% 1.05International Annuity (86) Buy $34.11 -1.7% 5.8% 17.5% 9.7% 3.7% 1.51

VANGUARD INCOME FUNDS

Fund (fund #) Ticker adviceavg. Mat.

8/30 Price

aug. Return

YTD Return

12-Mo. Return

3-Year Return

5-Year Return

12-Mo. Yield

seC Yield

—— Tax equivalent Yield ——Risk25% 28% 36.8%* 38.8%* 43.4%*

TAXABLE INCOMEShort-Term Treasury (32) VFISX Sell 2.2 $10.67 -0.2% -0.4% -0.3% 0.7% 2.0% 0.3% 0.27% — — — — — 0.22Short-Term Federal (49) VSGBX Sell 2.8 $10.67 -0.2% -0.8% -0.7% 1.0% 2.7% 0.5% 0.53% — — — — — 0.33Short-Term Inflation Index (1967) VTIPX Hold 2.7 $24.64 -0.5% -1.8% — — — 0.1% -1.06% — — — — — 0.73Short-Term Investment-Grade (39) VFSTX Buy 3.4 $10.65 -0.2% -0.3% 0.7% 2.1% 3.7% 1.8% 1.47% — — — — — 0.53Short-Term Bond Index (132) VBISX Hold 2.8 $10.48 -0.3% -0.6% -0.3% 1.3% 3.0% 1.2% 0.72% — — — — — 0.37Inflation-Protected Sec. (119) VIPSX Hold 8.8 $13.25 -1.7% -8.4% -7.4% 3.4% 3.8% 2.4% -0.10% — — — — — 2.03Intermed. Treasury (35) VFITX Sell 5.5 $11.19 -1.0% -3.4% -3.6% 2.0% 4.5% 1.4% 1.41% — — — — — 1.09Intermed. Investment-Grade (71) VFICX Buy 6.7 $9.71 -1.0% -3.1% -1.4% 4.1% 6.8% 3.3% 2.88% — — — — — 1.51Intermed.-Term Bond Index (314) VBIIX Hold 7.3 $11.17 -1.3% -4.5% -3.7% 3.3% 6.4% 2.9% 2.67% — — — — — 1.54Total Bond Market (84) VBMFX Hold 7.4 $10.58 -0.6% -3.0% -2.8% 2.3% 4.8% 2.4% 1.97% — — — — — 1.00GNMA (36) VFIIX Sell- 8.2 $10.39 -0.3% -3.3% -3.4% 2.2% 4.7% 2.3% 2.10% — — — — — 0.83long-Term Treasury (83) VUSTX Sell 23.9 $11.42 -1.3% -10.6% -13.5% 2.5% 6.2% 3.2% 3.31% — — — — — 4.73long-Term Investment-Grade (28) VWESX Hold 24.5 $9.69 -1.5% -7.5% -7.0% 4.8% 8.8% 5.0% 4.78% — — — — — 3.38long-Term Bond Index (522) VBlTX Sell 24.0 $12.56 -1.5% -9.4% -10.0% 3.9% 7.9% 4.4% 4.47% — — — — — 3.59High-Yield Corporate (29) (CLoseD) VWEHX Buy 6.9 $5.90 -1.0% 0.4% 4.6% 8.8% 9.2% 6.0% 4.94% — — — — — 2.27Emerging Mkts. Govt. Bond Idx. (1120)** VGOVX Buy 10.3 $9.33 -2.4% — — — — 0.9% 4.78% — — — — — 3.01Total International Bond Index (1231) VTIBX Hold 8.2 $9.84 -0.5% — — — — 0.4% 1.69% — — — — — 0.98 MONEY MARKETAdmiral Treasury MM (11) (CLoseD) VUSXX — 53 $1.00 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.01% — — — — — —Federal MM (33) (CLoseD) VMFXX — 56 $1.00 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.02% — — — — — —Prime MM (30) VMMXX — 59 $1.00 0.0% 0.0% 0.0% 0.0% 0.3% 0.0% 0.01% — — — — — —Tax-Exempt Money Market (45) VMSXX — 53 $1.00 0.0% 0.0% 0.0% 0.1% 0.3% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% —CA Tax-Exempt MM (62) VCTXX — 54 $1.00 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% —NJ Tax-Exempt MM (95) VNJXX — 41 $1.00 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% —NY Tax-Exempt MM (163) VYFXX — 37 $1.00 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% —OH Tax-Exempt MM (96) VOHXX — 40 $1.00 0.0% 0.0% 0.0% 0.1% 0.3% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% —PA Tax-Exempt MM (63) VPTXX — 30 $1.00 0.0% 0.0% 0.0% 0.0% 0.3% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% — TAX-FREE INCOMEShort-Term Tax-Exempt (41) VWSTX Buy 1.3 $15.82 -0.1% 0.0% 0.2% 0.8% 1.5% 0.9% 0.41% 0.5% 0.6% 0.6% 0.7% 0.7% 0.16limited-Term Tax-Exempt (31) VMlTX Buy 2.9 $10.96 -0.3% -0.6% -0.3% 1.3% 2.4% 1.7% 0.90% 1.2% 1.3% 1.4% 1.5% 1.6% 0.46Intermed.-Term Tax-Exempt (42) VWITX Buy 5.8 $13.54 -1.0% -3.9% -2.8% 2.2% 4.1% 3.2% 2.55% 3.4% 3.5% 4.0% 4.2% 4.5% 1.38long-Term Tax-Exempt (43) VWlTX Hold 9.3 $10.84 -1.5% -5.8% -4.3% 2.4% 4.2% 4.0% 3.58% 4.8% 5.0% 5.7% 5.8% 6.3% 1.71High-Yield Tax-Exempt (44) VWAHX Hold 10.5 $10.35 -1.9% -5.9% -4.2% 2.8% 4.6% 4.1% 3.84% 5.1% 5.3% 6.1% 6.3% 6.8% 1.74 STATE TAX-FREECA Intermed. Tax-Exempt (100) VCAIX Buy 5.8 $11.09 -0.9% -3.5% -2.0% 2.8% 4.2% 3.4% 2.56% 3.8% 4.0% 4.5% 4.7% 5.0% 1.43CA long-T. Tax-Exempt (75) VCITX Sell 9.6 $11.01 -1.4% -5.9% -4.1% 2.7% 4.0% 4.1% 3.65% 5.4% 5.7% 6.4% 6.6% 7.2% 1.84MA Tax-Exempt (168) VMATX Sell 8.6 $10.02 -1.3% -6.3% -5.4% 1.6% 3.7% 3.4% 3.14% 4.4% 4.6% 5.2% 5.4% 5.9% 1.73NJ long-T. Tax-Exempt (14) VNJTX Sell 9.2 $11.40 -1.2% -5.4% -4.4% 2.0% 3.8% 3.8% 3.43% 5.0% 5.2% 6.0% 6.2% 6.7% 1.67NY long-T. Tax-Exempt (76) VNYTX Sell 8.4 $10.87 -1.3% -5.7% -4.5% 2.0% 3.8% 3.6% 3.35% 4.9% 5.1% 5.8% 6.0% 6.5% 1.65OH long-T. Tax-Exempt (97) VOHIX Sell 10.4 $11.62 -1.6% -6.3% -4.8% 2.0% 4.0% 3.9% 3.79% 5.4% 5.6% 6.4% 6.6% 7.2% 1.71PA long-T. Tax-Exempt (77) VPAIX Sell 10.1 $10.80 -1.5% -5.6% -4.4% 2.1% 3.9% 3.9% 3.65% 5.0% 5.2% 6.0% 6.2% 6.7% 1.61


PERFORMANCE REV IEW

DISTRIBUTIONSFund Dist.AUGUST REGULAR

Short-Term Treasury $0.00 Short-Term Federal $0.00 Short-Term Investment-Grade $0.02 Short-Term Bond Index $0.01 Intermediate-Term Treasury $0.01 Intermediate-Term Investment-Grade $0.03 Intermediate-Term Bond Index $0.03 Total Bond Market Index $0.02 GNMA $0.02 long-Term Treasury $0.03 long-Term Investment-Grade $0.04 long-Term Bond Index $0.05 High-Yield Corporate $0.03 Emerging Markets Govt. Bond $0.03 Total International Bond $0.01 Admiral Treasury MM $0.00001 Federal MM $0.00002 Prime MM $0.00001 Tax-Exempt MM $0.00001 CA Tax-Exempt MM $0.00001 NJ Tax-Exempt MM $0.00001 NY Tax-Exempt MM $0.00001 OH Tax-Exempt MM $0.00001 PA Tax-Exempt MM $0.00001 Short-Term Tax-Exempt $0.01 limited-Term Tax-Exempt $0.02 Intermediate-Term Tax-Exempt $0.04 long-Term Tax-Exempt $0.04 High-Yield Tax-Exempt $0.04 CA Int.-Term Tax-Exempt $0.03 CA long-Term Tax-Exempt $0.04 MA Tax-Exempt $0.03 NJ long-Term Tax-Exempt $0.04 NY long-Term Tax-Exempt $0.03 OH long-Term Tax-Exempt $0.04 PA long-Term Tax-Exempt $0.04 ETF DISTRIBUTIONS

Short-Term Government Bond $0.01 Short-Term Corporate Bond $0.12 Short-Term Bond $0.08 Intermed.-Term Government Bond $0.07 Intermed.-Term Corporate Bond $0.22 Intermediate-Term Bond $0.22 Total Bond Market $0.17 Mortgage-Backed Securities Bond $0.05 long-Term Government Bond $0.20 long-Term Corporate Bond $0.35 long-Term Bond $0.33 Emerging Markets Govt. Bond $0.26 Total International Bond $0.07

VANGUARD ADMIRAL FUNDS

admiral Fund (fund #) Ticker Min.8/30

Priceaug.

ReturnYTD

Return12-Mo. Return

3-Year Return

5-Year Return

seC Yield

ADMIRAL SECTOR SHARESConsumer Discret. Index (5483) VCDAX $100K $48.34 -2.7% 23.0% 30.5% 26.6% 15.7% —Consumer Staples Index (5484) VCSAX $100K $50.28 -4.2% 16.0% 16.4% 18.2% 10.8% —Energy (551) VGElX $50K $120.27 -0.3% 8.5% 10.4% 12.4% 0.6% —Energy Index (5480) VENAX $100K $58.18 -1.5% 13.8% 14.9% 17.6% 2.9% —Financials Index (5486) VFAIX $100K $19.95 -5.0% 17.7% 27.1% 14.8% 1.7% —Health Care (552) VGHAX $50K $73.30 -2.1% 24.3% 28.8% 21.6% 11.7% —Health Care Index (5485) VHCIX $100K $44.99 -3.2% 25.5% 30.0% 23.9% 11.5% —Industrials Index (5482) VINAX $100K $43.24 -2.7% 18.2% 26.7% 19.7% 6.7% —Info.Technology Index (5487) VITAX $100K $39.75 -0.4% 12.3% 8.2% 17.3% 8.7% —Materials Index (5481) VMIAX $100K $46.34 -0.6% 8.1% 16.1% 14.0% 3.8% —REIT Index (5123) VGSlX $10K $91.53 -6.8% -0.1% 0.5% 12.7% 5.6% —Telecom Svcs. Index (5488) VTCAX $100K $40.02 -4.5% 12.2% 14.8% 14.7% 8.1% —Utilities Index (5489) VUIAX $100K $40.80 -5.2% 10.0% 8.8% 12.0% 4.8% — ADMIRAL EQUITY SHARESCapital Opportunity (5111) VHCAX $50K $97.60 -2.1% 25.7% 33.8% 20.6% 8.8% —Explorer (5024) VEXRX $50K $92.11 -1.7% 24.6% 31.0% 22.3% 9.8% —SmallCap Growth Index (5861) VSGAX $10K $37.90 -1.9% 21.1% 26.7% — — —SmallCap Index (548) VSMAX $10K $46.42 -3.2% 19.8% 26.5% 21.3% 9.8% —SmallCap Value Index (5860) VSIAX $10K $36.79 -4.2% 17.9% 25.7% — — —Extended Mkt. Index (598) VEXAX $10K $55.14 -2.8% 20.3% 27.1% 20.9% 9.4% —Growth Index (509) VIGAX $10K $41.70 -1.7% 14.5% 15.6% 19.2% 8.0% —MidCap Growth Index (5832) VMGMX $10K $34.88 -2.0% 18.1% 23.1% — — —MidCap Index (5859) VIMAX $10K $121.35 -2.5% 19.0% 24.9% 19.4% 9.1% —MidCap Value Index VMVAX $10K $36.46 -3.0% 19.7% 26.4% — — —Morgan Growth (526) VMRAX $50K $71.87 -2.0% 16.5% 17.7% 18.3% 7.0% —PRIMECAP (559) (CLoseD) VPMAX — $86.82 -1.7% 20.5% 25.5% 18.3% 7.8% —U.S. Growth (523) VWUAX $50K $63.91 -1.1% 16.2% 19.5% 19.5% 7.5% —500 Index (540) VFIAX $10K $151.07 -2.9% 16.1% 18.7% 18.4% 7.3% —Equity Income (565) VEIRX $50K $58.03 -3.5% 16.3% 19.1% 19.6% 9.0% —Growth & Income (593) VGIAX $50K $57.15 -3.1% 16.5% 19.1% 19.0% 6.6% —largeCap Index (5307) VlCAX $10K $37.96 -2.8% 16.5% 19.3% 18.5% 7.5% —Total Stock Market Index (585) VTSAX $10K $41.32 -2.8% 17.0% 20.2% 18.9% 7.8% —Value Index (506) VVIAX $10K $26.79 -3.6% 18.2% 22.9% 17.7% 6.9% —Windsor (5022) VWNEX $50K $60.89 -3.0% 20.1% 28.3% 19.8% 8.8% —Windsor II (573) VWNAX $50K $60.12 -3.1% 16.6% 20.8% 18.7% 7.5% —Balanced Index (502) VBIAX $10K $25.60 -1.9% 8.8% 10.7% 12.4% 7.2% —Wellesley Income (527) VWIAX $50K $59.59 -1.9% 3.6% 5.3% 9.3% 8.5% —Wellington (521) VWENX $50K $63.53 -2.2% 10.1% 13.4% 12.8% 7.7% —Developed Markets Index (5227) VDMAX $10K $30.12 -1.4% 7.4% 18.8% — — —Emerging Markets Stock Index (5533) VEMAX $10K $31.62 -3.2% -12.8% -1.8% 0.3% 1.3% —European Index (579) VEUSX $10K $63.90 -1.3% 8.1% 20.4% 10.6% 1.7% —International Growth (581) VWIlX $50K $64.98 -1.8% 6.0% 17.7% 10.0% 3.9% —Pacific Index (572) VPADX $10K $69.30 -1.6% 6.4% 16.4% 8.0% 3.0% —Total International Stock Index (569) VTIAX $10K $25.25 -1.7% 2.4% 13.2% — — —World ex-U.S. Index (570) VFWAX $10K $28.27 -1.7% 1.9% 12.9% — — — ADMIRAL INCOME SHARESShort-Term Treasury (532) VFIRX $50K $10.67 -0.1% -0.4% -0.2% 0.8% 2.1% 0.37%Short-Term Federal (549) VSGDX $50K $10.67 -0.2% -0.8% -0.6% 1.1% 2.8% 0.63%Short-Term Inflation Index (567) VTAPX $10K $24.66 -0.5% -1.8% — — — -0.96%Short-Term Inv.-Grade (539) VFSUX $50K $10.65 -0.2% -0.3% 0.8% 2.2% 3.8% 1.57%Short-Term Bond Idx. (5132) VBIRX $10K $10.48 -0.3% -0.5% -0.2% 1.4% 3.1% 0.82%Inflation-Protected Securities (5119) VAIPX $50K $26.02 -1.7% -8.3% -7.3% 3.6% 3.9% 0.00%Interm.-Term Treasury (535) VFIUX $50K $11.19 -1.0% -3.3% -3.5% 2.1% 4.6% 1.51%Interm.-Term Inv.-Grade (571) VFIDX $50K $9.71 -0.9% -3.1% -1.3% 4.2% 6.9% 2.98%Intermed.-Term Bond Idx. (5314) VBIlX $10K $11.17 -1.2% -4.4% -3.6% 3.4% 6.5% 2.77%Total Bond Market (584) VBTlX $10K $10.58 -0.6% -2.9% -2.7% 2.4% 4.9% 2.09%GNMA (536) VFIJX $50K $10.39 -0.3% -3.2% -3.3% 2.3% 4.8% 2.20%long-Term Treasury (583) VUSUX $50K $11.42 -1.3% -10.6% -13.4% 2.6% 6.3% 3.41%long-Term Inv.-Grade (568) VWETX $50K $9.69 -1.5% -7.4% -6.9% 4.9% 8.9% 4.88%High-Yield Corporate (529) (CLoseD) VWEAX — $5.90 -1.0% 0.4% 4.7% 8.9% 9.3% 5.04%Emerging Markets Govt. Bond Index (520)** VGAVX $10K $18.66 -2.4% — — — — 4.93%Total International Bond Index (511) VTABX $10K $19.69 -0.5% — — — — 1.72%Short-Term Tax-Exempt (541) VWSUX $50K $15.82 -0.1% 0.1% 0.3% 0.8% 1.6% 0.49%limited-Term Tax-Exempt (531) VMlUX $50K $10.96 -0.3% -0.6% -0.2% 1.3% 2.5% 0.98%Interm.-Term Tax-Exempt (542) VWIUX $50K $13.54 -1.0% -3.9% -2.8% 2.3% 4.2% 2.63%long-Term Tax-Exempt (543) VWlUX $50K $10.84 -1.5% -5.7% -4.2% 2.5% 4.3% 3.66%High-Yield Tax-Exempt (5044) VWAlX $50K $10.35 -1.9% -5.9% -4.1% 2.9% 4.7% 3.92%CA Intermed. Tax-Exempt (5100) VCADX $50K $11.09 -0.9% -3.4% -2.0% 2.8% 4.3% 2.64%CA long-T. Tax-Exempt (575) VClAX — $11.01 -1.4% -5.8% -4.0% 2.8% 4.1% 3.73%NJ Tax-Exempt (514) VNJUX $50K $11.40 -1.2% -5.3% -4.3% 2.1% 3.9% 3.51%NY Tax-Exempt (576) VNYUX $50K $10.87 -1.3% -5.6% -4.5% 2.0% 3.9% 3.43%PA Tax-Exempt (577) VPAlX $50K $10.80 -1.5% -5.6% -4.3% 2.1% 4.0% 3.73%

Distributions are per share. All distributions are reinvested at month-end Net Asset Value unless otherwise noted.

admiral shares are identical to regular, “investor” shares (and my recommendations are the same as those for “investor” shares) except that their operating expenses are several basis points lower. (One basis point equals one one-hundredth of a percent.) For instance, a fund with an operating expense ratio of, say, 0.25%, might have Admiral shares available with an operating expense ratio of 0.21%.** Fund sold with a 0.75% front-end load


PERFORMANCE REV IEW

Vanguard exchange-traded fund shares can be bought and sold like stocks, anytime markets are open. They are expected to track the performance of Vanguard’s like-named index funds closely, though not precisely. Price and performance are based on actual closing prices, not net asset value. Individual investor performance can vary depending on price variability during the trading day. Buy, Sell and Hold ratings may differ from open-end versions of the same index funds listed in the Investor share section of the Performance Review if an alternative ETF is better or worse.

VANGUARD EXCHANGE-TRADED FUNDS

Fund Ticker advice8/30

Priceaug.

ReturnYTD

Return12-Mo. Return

3-Year Return

5-Year Return

12-Mo. Yield

seC Yield Risk

BROAD EQUITY ETFSSmallCap Growth VBK Buy $107.83 -1.9% 21.1% 26.8% 23.3% 10.4% 0.9% — 1.41S&P SmallCap 600 Growth VIOG Buy $87.77 -1.5% 22.5% 25.4% — — 0.9% — 1.22Russell 2000 Growth VTWG Hold $85.59 -1.9% 23.8% 27.9% — — 0.7% — 1.44SmallCap VB Hold $96.83 -3.2% 19.7% 26.5% 21.3% 9.8% 1.6% — 1.34S&P SmallCap 600 VIOO Hold $84.98 -2.4% 21.0% 26.4% — — 1.2% — 1.31Russell 2000 VTWO Hold $80.46 -3.2% 20.1% 26.1% — — 1.3% — 1.34SmallCap Value VBR Hold $85.70 -4.2% 18.0% 25.8% 19.2% 9.0% 2.2% — 1.30S&P SmallCap 600 Value VIOV Hold $82.97 -3.1% 20.0% 27.8% — — 1.1% — 1.34Russell 2000 Value VTWV Hold $75.48 -4.4% 16.8% 24.1% — — 1.6% — 1.38Extended Market VXF Sell $72.62 -2.9% 20.1% 27.1% 20.9% 9.4% 1.4% — 1.33Growth VUG Hold $80.98 -1.9% 14.5% 15.6% 19.2% 8.0% 1.4% — 1.07S&P 500 Growth VOOG Buy $77.27 -2.5% 15.0% 14.9% — — 1.7% — 0.90Russell 1000 Growth VONG Hold $77.02 -1.7% 15.5% 16.3% — — 1.6% — 1.00MegaCap Growth MGK Buy $62.67 -1.6% 13.7% 14.0% 19.1% 7.9% 1.6% — 1.04MidCap Growth VOT Hold $80.99 -2.1% 18.1% 23.0% 19.5% 7.9% 0.6% — 1.33S&P MidCap 400 Growth IVOG Buy $80.92 -4.3% 15.7% 20.6% — — 0.6% — 1.29MidCap VO Buy $97.96 -2.6% 18.9% 24.9% 19.4% 9.1% 1.2% — 1.21S&P MidCap 400 IVOO Buy $79.69 -3.8% 17.1% 23.5% — — 0.9% — 1.20MidCap Value VOE Hold $70.42 -2.9% 19.8% 26.5% 19.0% 9.9% 1.6% — 1.13S&P MidCap 400 Value IVOV Buy $77.90 -4.0% 18.7% 26.2% — — 1.4% — 1.35S&P 500 VOO Buy $74.85 -3.1% 15.9% 18.4% — — 2.0% — 1.00Russell 1000 VONE Buy $75.40 -2.8% 16.7% 19.7% — — 1.9% — 1.02Dividend Appreciation VIG Buy $67.29 -3.6% 14.0% 16.9% 16.7% 7.9% 2.2% — 0.87High Dividend Yield VYM Buy $56.59 -3.9% 16.2% 18.0% 19.3% 8.3% 3.0% — 0.81largeCap VV Buy $75.13 -2.9% 16.4% 19.2% 18.5% 7.5% 1.9% — 1.02MegaCap MGC Buy $55.94 -3.0% 15.7% 17.8% 18.3% 7.1% 2.1% — 0.99Total Stock Market VTI Hold $84.77 -3.0% 16.7% 19.9% 18.9% 7.7% 2.0% — 1.05Russell 3000 VTHR Hold $75.79 -2.8% 17.1% 20.3% — — 1.7% — 1.03Value VTV Hold $68.63 -3.7% 18.1% 22.7% 17.7% 6.9% 2.4% — 1.00S&P 500 Value VOOV Hold $73.59 -4.0% 17.0% 22.6% — — 2.1% — 1.11Russell 1000 Value VONV Hold $73.82 -3.8% 17.7% 22.6% — — 2.1% — 1.04MegaCap Value MGV Hold $49.66 -3.8% 17.8% 22.0% 17.5% 6.2% 2.5% — 1.00 INTERNATIONAL ETFSEmerging Markets VWO Hold $37.72 -3.4% -14.1% -2.4% -0.0% 1.1% 4.1% — 1.81Developed Markets VEA Sell $36.85 -1.6% 6.7% 18.5% 9.3% 1.8% 4.7% — 1.34European VGK Hold $51.04 -1.5% 7.1% 20.0% 10.5% 1.5% 5.2% — 1.53Pacific VPl Hold $56.03 -1.5% 6.0% 16.4% 8.0% 2.9% 4.0% — 1.21Total International Stock VXUS Hold $47.07 -1.5% 1.6% 13.4% — — 4.5% — 1.38Total World Stock VT Hold $52.84 -2.5% 8.2% 16.1% 11.9% 4.5% 3.3% — 1.21World ex-U.S. VEU Sell $45.38 -2.0% 0.8% 12.4% 6.9% 1.6% 4.5% — 1.44World ex-U.S. SmallCap VSS Hold $92.91 -1.0% 3.2% 15.2% 8.0% — 3.9% — 1.49 SECTOR ETFSConsumer Discretionary VCR NA $93.46 -2.7% 23.2% 30.5% 26.7% 15.7% 1.2% — 1.12Consumer Staples VDC NA $102.00 -4.3% 16.0% 16.5% 18.2% 10.8% 2.5% — 0.74Energy VDE NA $116.54 -1.5% 14.0% 15.0% 17.6% 2.8% 1.7% — 1.64Financials VFH NA $39.80 -5.1% 17.6% 27.0% 14.8% 1.6% 2.0% — 1.41Health Care VHT NA $89.85 -3.4% 25.4% 29.6% 23.9% 11.5% 1.3% — 0.90Industrials VIS NA $84.15 -2.9% 18.1% 26.6% 19.7% 6.8% 1.8% — 1.28Information Tech. VGT NA $77.67 -0.4% 12.4% 8.2% 17.3% 8.6% 1.1% — 1.22Materials VAW NA $91.00 -0.6% 8.1% 16.1% 14.0% 3.8% 1.7% — 1.71REIT VNQ NA $64.50 -7.0% -0.3% 0.3% 12.6% 5.5% 3.9% — 1.41Global ex-U.S. Real Estate VNQI NA $52.69 -2.2% -4.0% 10.1% — — 6.1% — 1.61Telecom. Services VOX NA $78.45 -4.6% 12.1% 14.7% 14.6% 7.5% 3.1% — 0.99Utilities VPU NA $81.26 -5.3% 9.9% 8.7% 11.9% 4.5% 3.8% — 0.95 INCOME ETFSShort-Term Government VGSH Sell $60.74 -0.1% -0.1% -0.1% 0.6% — 0.3% 0.24% 0.13Short-Term Inflation Bond VTIP Hold $49.14 -0.5% -2.0% — — — 0.1% -0.96% 0.75Short-Term Corporate VCSH Buy $78.93 -0.2% -0.5% 0.6% 2.8% — 1.9% 1.63% 0.85Short-Term Bond BSV Hold $80.04 -0.3% -0.4% -0.2% 1.4% 3.1% 2.3% 0.82% 0.37Int.-Term Government Bond VGIT Sell $62.92 -1.0% -3.0% -3.3% 2.1% — 1.4% 1.47% 1.10Int.-Term Corporate VCIT Buy $82.23 -1.1% -4.2% -2.3% 4.4% — 3.3% 3.58% 2.04Int.-Term Bond BIV Hold $82.52 -1.1% -4.5% -3.6% 3.3% 6.4% 3.1% 2.77% 1.58Total Bond Market BND Hold $80.16 -0.9% -3.1% -2.9% 2.3% 4.7% 2.5% 2.09% 1.01Mortgage-Backed Securities VMBS Sell- $50.72 -0.5% -2.4% -2.9% 1.9% — 0.6% 0.95% 0.67long-Term Government VGlT Sell $66.34 -1.3% -10.2% -13.2% 2.6% — 3.1% 3.49% 4.80long-Term Corporate VClT Hold $81.95 -1.4% -7.8% -7.9% 4.5% — 4.9% 5.17% 3.75long-Term Bond BlV Sell $82.85 -1.4% -9.4% -10.2% 3.8% 7.8% 4.5% 4.57% 3.61Ext. Duration Treasury EDV Sell $96.29 -1.1% -15.7% -21.0% 3.2% 7.5% 3.7% 3.80% 9.14Emerging Markets Govt. Bond VWOB Buy $74.52 -2.7% — — — — 0.6% 4.93% —Total International Bond BNDX Hold $49.32 0.6% — — — — 0.3% 1.72% —


havInG ShoWn that six sub-advis-ers and 11 different portfolio manag-ers isn’t enough to make its active Explorer capable of outperforming a simple index fund, vanguard added a seventh management outfit and 12th manager to the gigantic small-cap growth fund on aug. 12.

ryan e. Crane of Stephens Investment Management (little rock, ar and houston, tX) will be taking on a small portion of explorer, and there is every expectation that the position will grow over time.

amazingly, vanguard doesn’t seem to recognize that a small-cap growth fund with $11.2 billion in assets can’t be an index-beater when they’ve got so many cooks in the kitchen.

or maybe they do realize the fund is a has-been. only one board member, alfred rankin, owns shares in explorer. Chairman bill Mcnabb doesn’t. and just six of explorer’s portfolio managers own shares in the fund, with just one manager, ken abrams of Wellington, with more than $1 million invested there.

Whether you consider explorer’s long-term relative performance against the index benchmark that vanguard uses, as illustrated in the chart below, or its rolling performance, as in the first chart above, the fund simply can’t get out of its own, bloated way. Jack bogle once said, “everyone knows that if you have multiple managers, you end

up with index-like performance.” amen to that.

the one saving grace here is that, based on returns for Stephens’ Small-Mid Growth strategy, the team has been able to outperform explorer since 2005, the period for which public data is available. of course, whether the outperformance of a tiny sliver of the fund will be able to move this battle-

ship remains to be seen. ken abrams’ and Jack Granahan’s long-term track records are explorer beaters, but the fund is simply over-burdened.

you might ask why various manag-ers of the fund don’t see this as a los-ing strategy. Well, it’s not a loser for the individual managers, because each one’s portion or sleeve of the portfolio is considered independently when bonus time rolls around. one or two managers can beat the benchmark that vanguard has established for each of their port-folios (the russell 2500 Growth index, which the fund is measured against, or the russell 2500 or the russell 2000 or some combination) and earn their performance bonuses no matter what happens to the overall fund and its share-holders. (Maybe that’s why so few man-

EXPLORER

Beware the Bloat

Explorer has Lagged for a Decade

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Explorer vs. Russell 2500 Growth Index Over Rolling 5-Year PeriodsExplorer vs. Russell 2500 Growth Index Over Rolling 3-Year Periods

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Explorer vs. Russell 2500 Growth Index

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Chartwell and Vanguard added to fund

agers commit lots of dollars here—why invest in the work of your competitors/peers who you may not believe are as good as you are?) In fact, there’ve been a couple of times over the past few years when the fund has paid a performance bonus despite the fact that its trailing three-year return lagged the benchmark. apparently, one or two managers can be earning a bonus that outweighs the give-

backs the other managers are paying and, voilà, fund shareholders pay extra for overall fund underperformance.

vanguard seems to think that the fact that explorer outperforms the average high-expense-ratio small-cap growth fund makes the strategy a good one. but consider that the only reason explorer is outperforming the average fund (a pretty meager hurdle to overcome) is because its expense ratio of 0.51% is 94 basis points, or 0.94%, lower than its small-cap growth fund competitors. It isn’t that many hands are making lighter work here, it’s that they are getting a pass because vanguard runs cheap funds.

national airlines once asked, “Is this any way to run an airline?” I might ask, “Is this any way to run a mutual fund?”

does anyone remember national? n

Stephens Has Outperformed Explorer

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Vanguard seems to think the fact that Explorer out-performs the average high-expense-ratio small-cap growth fund makes their strategy a good one.


DISTRIBUTIONS TO COME

september’s PayoutsAMAzINGlY, we’re almost three quarters of the way through the year, and it’s time for September’s quarterly distributions.

Taxable investors directing distributions into their money market accounts—some-thing I recommend instead of automatically reinvesting in the fund from which the distributions come—will be able to redeploy the money into underweighted funds rather than having to sell shares down the road. The regular quarterly income fund and ETF payers include:

500 IndexBalanced IndexConvertible SecuritiesDeveloped Markets ETFDividend Appreciation IndexEmerging Markets IndexEquity IncomeEuropean IndexExtended Duration Treasury ETFFinancials IndexGlobal ex-U.S. Real Estate IndexGrowth IndexHigh Dividend Yield IndexInflation-Protected Securitieslarge-Cap IndexMegaCap ETFMegaCap Growth ETFMegaCap Value ETFPacific IndexREIT IndexRussell 1000 ETFRussell 1000 Growth ETFRussell 1000 Value ETFRussell 3000 ETFS&P 500 Growth ETFS&P 500 Value ETFShort-Term Inflation-Protected Sec. IndexSTAR lifeStrategy Conservative GrowthSTAR lifeStrategy IncomeTarget Retirement IncomeTax-Managed BalancedTax-Managed Growth & IncomeTax-Managed InternationalTotal International Stock IndexTotal Stock Market IndexTotal World Stock IndexUtilities IndexValue IndexWellesley IncomeWellingtonWorld ex-U.S. IndexWorld ex-U.S. Small-Cap Index

six-month period those dividends prob-ably contributed an additional 1% in total return.

the 12-month yield, also called a distribution yield, or distributed yield consists of all interest or dividend income payments plus any capital gains distributions made by the fund over the preceding 12 months, as a percentage of the current share price.

the distribution yield can differ dra-matically from the SeC yield for many reasons. First, the SeC yield is mea-sured over the preceding 30 days, so in a rising interest rate environment, the SeC yield may look higher than the distribution yield, which incorporates income that may have been paid when interest rates were lower.

also, not all SeC yields are com-parable. For your typical bond fund, the SeC yield is based on the yield to maturity for the past 30 days for all the holdings in the fund. For the typical stock fund, the SeC yield is

you’ve aSked and I’ve tried, over the years, to answer questions I think will benefit a large number of our FFSa members. I hope this helps. –DPW

Why are the “12-Month Return” and “12-Month Yield” of the bond funds on page 9 so very different?

Great question. the simple answer is that total return is a combination of both yield and price changes. and the 12-month yield, which is not the same as the SeC yield you see reported on most fund company websites, deals solely with distributions. the differ-ences are important.

First, the 12-month returns for all the funds in the Performance Review pages are total returns, calculated using both the change in share price over the prior 12 months as well as the value of any reinvested interest, dividends or capital gains paid during that peri-od. this differs from a “price return,” which doesn’t take any distributions into account.

Most returns you’ll see for mutual funds are total returns. and it should be said that total returns incorporate expense ratios. I’ve heard investors compare two funds with identical returns and then say, “but this one returned less because its expense ratio is higher.” Wrong. they returned the same amount despite the fact that one’s expense ratio was higher.

be aware, by the way, that when you see returns quoted for indexes, like the dow Jones Industrial average or the S&p 500, unless it is specifically stated that the number is a total return, then it’s probably a price-only return. the news media will say, for instance, “the dow gained 1,000 points over the last six months, up 7%.” that may be cor-rect for the index itself, but if dividends were paid out over that period (and over six months, they almost certainly were), then the total return for the index will be higher. In fact, if the dow is yielding about 2%, you can estimate that over a

QUESTIONS AND ANSWERS

Yield Confusion

Bond Fund Distribution Yields1-mo 3-mo 6-mo

High-Yield Corporate 6.01% 6.04% 6.04%long-Term Inv.-Grade 4.96% 4.99% 4.94%long-Term Bond Index 4.33% 4.34% 4.32%CA long-Term Tax-Ex. 3.98% 4.02% 3.98%High-Yield Tax-Exempt 3.98% 3.96% 3.94%long-Term Tax-Exempt 3.97% 4.01% 3.94%OH long-Term Tax-Ex. 3.79% 3.77% 3.74%PA long-Term Tax-Ex. 3.78% 3.79% 3.76%NJ long-Term Tax-Ex. 3.69% 3.74% 3.67%NY long-Term Tax-Ex. 3.54% 3.56% 3.50%MA Tax-Exempt 3.29% 3.28% 3.26%Int.-Term Inv.-Grade 3.16% 3.21% 3.20%CA Int.-Term Tax-Ex. 3.16% 3.35% 3.37%Int.-Term Tax-Exempt 3.12% 3.13% 3.07%long-Term Treasury 3.06% 3.14% 3.14%Int.-Term Bond Index 2.85% 2.90% 2.90%Total Bond Mkt. Idx. 2.30% 2.32% 2.32%GNMA 2.19% 2.24% 2.22%Short-Term Inv.-Grade 1.65% 1.68% 1.73%limited-Term Tax-Ex. 1.60% 1.67% 1.68%Int.-Term Treasury 1.40% 1.42% 1.42%Short-Term Bond Index 1.06% 1.12% 1.17%Short-Term Tax-Exempt 0.83% 0.90% 0.91%Short-Term Federal 0.48% 0.49% 0.48%Short-Term Treasury 0.30% 0.32% 0.33%All data through June 30, 2013, annualized.

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based on the dividend for the last 30 days of the prior month. and just to confuse things further, money market SeC yields are based on the last seven days of income, annualized. Inflation-Protected Securities and its little brother Short-Term Inflation Index calculate their SeC yields based on the prior 30 days ending in the prior week.

and finally, GNMA is an odd duck unto itself. It’s complicated, but the way the SeC requires vanguard to report the yield on this fund has almost no easy comparison with the SeC yield on more traditional bond funds. you can com-pare it to other GnMa funds, but com-paring the yield to, say, Intermediate-Term Investment-Grade is an apples-to-bananas comparison.

partly, the difference stems from the fact that GnMa’s yield is calcu-lated based on the actual income that’s paid by the bonds in the portfolio. remember, GnMa bonds can see their yields decline if the underlying mort-gages are prepaid—i.e., paid off before they are due to mature. So, using a “yield to maturity” calculation isn’t valid, according to the SeC.

also, the GnMa market consists of something called “to be announced” securities, which don’t have a yield per se but are essentially contracts for GnMa securities still in formation. tbas are a kind of virtual security, and GnMa manager Michael Garrett

uses these securities in the portfolio to provide liquidity at times, adding to the problematic calculation of a “yield” for the fund. In fact, Total Bond Market’s yield is also impacted by the dif-ferent calculations used for different segments of its portfolio—and with 25% of the fund invested in mortgage securities, well, its yield is a hybrid calculation.

While vanguard marks its bond funds’ yields with footnotes on its web-site (though it doesn’t make the specific distinction with total bond Market), there’s no real discussion given to the differences in these yields, and hence, when you see them all lined up in a row on vanguard.com you’re led to believe they are comparable. also, vanguard doesn’t explain the differenc-es between various yields in its reports to shareholders, either. the January 2013 annual report for its government bond funds, for example, shows a table of yields from both the end of January 2012 and January 2013 ranked from lowest to highest. but, in fact, GnMa’s yield can’t be compared directly with the other funds’.

the takeaway from my standpoint, is that the only way to compare funds is to look at their distributed yields. you can look at 12-month yields, which are found in the Performance Review every month, or even shorter com-parisons. For instance, in the table

on page 13, I’ve calculated and then annualized the one-month, three-month and six-month distribution yields for vanguard’s bond funds through the end of June. (I skipped the two new foreign bond funds, where distribu-tions may still be finding their level after just one month, and the inflation funds, as their numbers are skewed by their payout schedules and the inflation

components.) the table’s numbers will give you a better feel for the payouts the funds have been making recently, but give no guidance on what they’ll pay this month, or next. then again, the figures on vanguard.com don’t help much in that regard, either.

In a nutshell, long-term funds, and particularly the tax-exempt funds, are paying out some fairly substantial yields compared to their shorter-term siblings.

also, note that muni fund yields have actually expanded a tiny bit over the past month from what they were paying over the past several months. Selling in that part of the market has made the bonds increasingly attractive. n

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Indeed, dumping alliancebernstein was good for shareholders.

over at International Value, drop-ping the alliancebernstein team and pick-ing up arGa Investment Management in the process didn’t reduce the man-agement muddle very much, but when vanguard also pink-slipped long-time manager hansberger Global Investors, the fund began the weight-reduction pro-cess it so badly needed.

It’s always hard to tell—particularly during transitions—who’s contributing

down to 14%. as alliancebernstein’s role diminished, Global equity’s per-formance began to improve, and since its firing, the fund’s outperformance versus Total World Stock Index has gotten even better.

as I wrote a year ago when vanguard made the firing public, “this may be one of the best moves vanguard could have made…I expect that, over time [Global equity] will once again show better long-term relative performance when compared to total World Stock Index.”

It’S been JuSt a year since alliancebernstein was finally given the boot by vanguard after years of sub-par performance and questions about the firm’s stability. While a year is short, I thought it would be worthwhile check-ing in on the fortunes of the funds that shed their alliancebernstein anchors.

at Global Equity, alliancebernstein had managed as much as 31% of the fund’s assets in its heyday. by the time of the final report on its role in the fund, that “sleeve” had been knocked

MANAGEMENT

Breaking an Alliance

GNMA is an odd duck unto itself. You can compare it to other GNMA funds, but otherwise it’s an apples-to-bananas comparison.


the most to performance, but as the sec-ond chart to the right shows, it doesn’t really matter as far as 2013 is con-cerned. International value has been on a tear relative to Total International, and is up 6.2% so far this year versus the index fund’s 2.4% gain.

a year ago I wrote that I really haven’t been a fan of International value for some time and remained a bit skeptical given the paucity of informa-tion I was able to find on arGa’s track record. that being said, it has definitely improved on a relative basis since the manager musical chairs came to an end. but I’ll repeat what I wrote a year ago: “I’ll stick with International Growth for my foreign stock exposure.” as noted, while International value has gained 6.2% this year, International Growth is up 6.0%.

Finally, last month I took a long look at the venerable Windsor, which

is definitely seeing the benefits of hav-ing dumped alliancebernstein for pzena Investment Management. of course, Jim Mordy of Wellington is doing the heavy lifting, and his excellence is show-ing. Windsor is up 20.0% for the year through august versus Value Index’s gain of 18.1%.

International Value vs.Total International

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Global Equity vs.Total World Stock Index

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again, one year is a very short period of time, and yet, on both Global equity and International value in particular, vanguard made what I consider the correct move to reduce the number of managers running the funds. this is precisely the opposite of what the firm continues to do at Explorer, as I explain on page 12. n

at the end of august, it was 2.75% after having hit a high of 2.92%. that increase of 99 basis points (or 0.99%), translated into a loss of 6.9% for bond holders.

only eight of vanguard bond funds have fallen that much or more this year. Extended Duration Treasury ETF and Long-Term Treasury are off 15.7% and 10.6%, respectively. but they are far from typical. Total Bond Market is down a more moderate 3.0%. you and I don’t own long bonds, and you won’t find them in my Model Portfolios. We do own High-Yield Corporate, which has managed to hold on to a small gain this year, up 0.4%. GNMA, which is off 3.3% on the year, has been a disap-pointment, and as it has not lived up to my expectations, I am dropping it from my Model Portfolios. (See page 3 for more on this trade.) another hold-ing, Intermediate-Term Investment-Grade, is off just 3.1%.

Seeing losses in any part of our port-folios is never fun, but unless you were caught holding “typical” long-maturity bonds, the pain just hasn’t been that acute. bonds still deserve a role in a

diversified portfolio, and all of my Models fit that description.

as we head into September, I expect both bond and stock markets to become more volatile. (and no, I don’t expect more market mayhem akin to the nasdaq’s 3-hour trading halt.) not only will investors be waiting for the Fed’s post-meeting revelations, but September 15 marks the five-year anniversary of the lehman bros. bank-ruptcy, and I can only imagine the dire headlines that will accompany articles and blog posts heralding why it almost certainly could happen again. First off, those kinds of apocalyptic analyses should be taken with a large grain of salt. In addition, remember that you and I aren’t investing in indexes that seek to “own the market”, and by extension both the best and worst of the financial behemoths. our active managers are making choices for us and, I’m confident, will avoid any lehmans they find.

Managed ChangeIt isn’t written in stone, but I think

change is brewing for the Managed payout funds, which hit their five-year birthday this summer. reading

between the lines of the most recent semiannual letter to shareholders, I’d say vanguard’s preparing to make a move. yes, vanguard says it “remains committed to the managed payout fund concept,” but that doesn’t mean it is committed to the current funds’ oper-ating principles. the motive for the change is simple: the funds haven’t delivered on their objectives.

let’s start with Managed Payout Distribution Focus. vanguard says the fund “seeks to maintain the dollar value of an investor’s original invest-ment and payment amounts over the long term.” Consider an investor who invested $25,000 (the minimum) into the fund at the end of June 2008, a month after inception and, as would be expected, withdrew all of the income and capital gains over the past five years. by the end of June 2013, that $25,000 would have shrunk to $19,717. okay, that’s one strike against the fund for not maintaining the dollar value of the original investment. and the monthly payout? In June 2013 the investor would have received a $45.43 payout, down from $62.61 five years ago. Strike two.

as for Managed Payout Growth

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Daniel P. Wiener is America’s leading expert on the Vanguard family of funds. He is founder of the Fund Family Shareholder Association and chief executive officer and chief investment strategist of Adviser Investments, LLC, a Newton, Massachusetts, investment advisory firm (800-492-6868). As editor of the Independent adviser for vanguard Investors, he is a five-time recipient of the Newsletter Publishers Foundation’s Editorial Excellence Award. He also edits the annual Independent Guide to the vanguard Funds. Mr. Wiener is often quoted in the nation’s leading financial publications.

DAN’S DO-IT-NOW ACTION RECOMMENDATIONS

4 Opportunities still remain with large growth funds, which have enjoyed a nice run the past three years. But keep your expectations in check. PRiMeCaP is the best of the bunch. (See page 2)

4 gnMa isn’t living up to my expectations. It’s time to cut our losses and trade back into short-Term investment-grade for more consistent short-maturity bond exposure. (See page 3)

4 explorer picked up a seventh sub-advisor in August. One more cook in the kitchen isn’t going to straighten out this bloated behemoth of a small-cap fund. (See page 7)

The New AdviserOnline

TiMes Change, and so does technol-ogy. Back in 1991, I would write the monthly newsletter at my Macintosh, print it at the copy shop, and, with the help of my then 6-year-old son, fold, label and post it to subscribers. In 1992, I got the help of designer par excellence John Hall for the print edition, and later in the ‘90s, the team at InvestorPlace Media set up AdviserOnline for the web.

Since then, our site has gone through a few redesigns, and June brought the lat-est. It’s more streamlined, easier to use, and even better, mobile-ready, putting all the Vanguard news you need literally right at your fingertips on your mobile phone or tablet. Here’s what’s new:n Cleaner look with fewer sidebarsn Updated navigation for easier access

to Customer Service, Special Reports and the annual Independent Guide to the Vanguard Funds

n improved Customer service page for fast answers to common questions

n Custom views for the Model PortfoliosVisit the new AdviserOnline.com today.

If you have any questions or problems, call us at 800-211-7641 or email us at [email protected].

and Distribution, the record isn’t much better. this fund “seeks to make monthly payouts that, over time, keep pace with inflation.” a $25,000 invest-ment would have generated a monthly payout of a bit more than $110 at the start of the five-year period. but by June 2013, the monthly payout would have shrunk to $93 plus a few pennies. yet, over those five years, inflation rose 7.1%. had the fund delivered on its goal, the monthly payout should have been closer to $118. as for the initial $25,000 invested, it would have dropped to $23,929.

Managed Payout Growth Focus has the lofty aim to “increase monthly pay-outs and the invested capital at a rate that outpaces inflation over time.” a $25,000 investment five years ago would have grown to $26,024. unfortunately, that 4.1% gain is several points shy of the 7.1% rise in inflation. and monthly pay-outs decreased from $67 to $57, or 15%.

yes, on a total return basis, the Managed payout funds are all up between 22% and 24% over the five years ending in June 2013. but the funds were built with the express objec-tive of delivering monthly income, which would be spent, not plowed back into more shares. Investors wagering that vanguard would deliver on its promises have been disappointed, as has vanguard. let’s see what changes may come.

TIPS Traders Warnedlate in august, vanguard filed an

amendment to its prospectus for Short-Term Inflation-Protected Index giving it the right to reject quick trading in the fund. that’s not to say that there’s any evidence of lots of short-term trading—since inception last october, the fund has only seen monthly inflows, includ-ing vanguard’s own switch from big brother Inflation-Protected Securities in its Target Retirement funds. but, given all the anxiety over inflation, Fed policy and investors’ general skittishness around the bond market, vanguard’s making sure the language is in the pro-spectus and investors (those who read it, anyway) are forewarned. obviously, if you wanted to trade the fund, the etF shares are the way to go.

Finally, I was amused to see vanguard’s pr guy, andy Clarke, trying to link the launch of 500 Index in 1976 to the declaration of Independence in a blog post in late august. (note to andy: Independence day was in July.) Clarke writes the fund was a “declaration of independence from ruinous invest-ment fees.” Well, not really. 500 Index began life as a load fund, so rather than declaring independence, the fund (which eventually went no-load) sim-ply followed the trend of the day, ding-ing early shareholders with a marketing fee. but why let the facts get in the way of a good (if twisted) metaphor? n

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vgfa 2013-09

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