Vanguard Mutual Fund #1: Growth Equity (VGEQX)
Turner Investment Partners ran Growth Equity (VGEQX) until 2009, and their high-turnover earnings momentum strategy was bad news for shareholders. The fund plummeted to a terrifying depth of -68.7% in two years and has yet to recover. Even nearly five years after the start of its downward spiral, at the end of 2005, it would have required a 100% return just to break even. And while the fund seems to have tracked its benchmark, the Russell 1000 Growth Index, pretty closely, I found that after comparing rolling returns, the fund lagged on average and hit lower lows at its worst.
But all of that is water under the bridge. This is a new fund now, under the guidance of two management teams, Bailie Gifford and Jennison Associates, and in my eyes, bears watching, but not investing in just yet.
Since the fund's inception, it has tracked very closely with either the NASDAQ Composite or the Russell 1000 Growth index. We'll see if this continues under its new multi-management mantle.
Vanguard Mutual Fund #2: Precious Metals & Mining (VGPMX)
A bull run in metals can make a fund like Precious Metals & Mining (VGPMX) look very attractive. But when the going gets rough, investors should watch out below.
The fund's maximum cumulative loss ran at nearly 68.9% in 2008, and it has a long way to go to recover. Of course, I have great respect for Manager Graham French, as he takes a long, diversified view, and he knows his stuff. But as mining companies continue to merge without regard to the best interest of shareholders, diversification is increasingly difficult.
Considering the huge risks associated with this sector, this fund is only for speculators, not investors. And even speculators shouldn't allocate more than 5% of their portfolio to it.
Vanguard Mutual Fund #3: STAR LifeStrategy Income (VASIX)
STAR LifeStrategy Income (VASIX) is the most conservative STAR LifeStrategy fund. In general, it puts just over 20% of assets into equities and the rest in bonds. None of the equities are in overseas markets, 20% of the bonds are short-term, and none of the bonds are long-term, except when Asset Allocation has some money there.
Vanguard says the fund is appropriate for people in their late retirement years (ages 75 and over). But my guess is that by the time you're 75, you'll have built up a mix of investments into which this fund may not fit at all. And if you're new to the investing game, this is a very conservative fund that may not suit your needs.
All but the most conservative, income-oriented investors should be very cautious about throwing their money in here for the long haul.
Vanguard Mutual Fund #4: Diversified Equity (VDEQX)
Diversified Equity (VDEQX) is one of Vanguard's newer funds of funds. But instead of investing entirely in index funds, like many of the others, this one invests in a portfolio of eight actively managed Vanguard funds. That adds up to a lot of managers.
Unfortunately, some of the best managers, such as PRIMECAP Management, weren't included, and one of the worst, namely AllianceBernstein of U.S. Growth, was. For the moment, that makes it easy for Vanguard to claim active management doesn't work, but it's not what I'd call a fair fight.
Based on back-testing — and not surprisingly with around 20 management teams — the fund should perform almost like a clone of Total Stock Market, though it recently began to lag. But whichever way you cut it, my model portfolios have put this fund and the market index fund to shame, so I don't recommend it.
Vanguard Mutual Fund #5: High-Yield Tax-Exempt (VWAHX)
High-Yield Tax-Exempt (VWAHX) is not a "junk bond" fund, but it is a high-yield fund. It is the riskiest of Vanguard's long-term tax-exempt bond portfolios, and as such, it offers the highest yields of the municipal bond funds. It buys less creditworthy bonds, and also those with long maturities — a double dose of risk. And for a while I thought it was worth owning for those above-average yields. But right now, I'm a chicken.
The fund isn't really comparable to High-Yield Corporate. It's more on par with Long-Term Investment-Grade. The difference between this fund and its tax-exempt siblings is that High-Yield Tax-Exempt holds about 75% of its portfolio in A-rated bonds, while a fund like Long-Term Tax-Exempt, for instance, has more than 90% of its portfolio there. All of that being said, this fund does produce a nice tax-exempt yield.
If you really like that tax-free cash coming in month after month and are willing to take the risk of principal loss, you might disagree with my recommendation. But please don't overdo it. The bonds producing those higher yields also produce bigger losses when the winds change direction.
Vanguard Mutual Fund #6: Tax-Managed International (VTMGX)
Tax-Managed International (VTMGX) is a straight-out, diversified foreign stock fund wrapped in the Tax-Managed package. But it comes with a price: a high investment minimum of $10,000 and a back-end load ("redemption fee") of 1% for shares held less than five years.
Unlike an international fund of funds (which Total International was until Vanguard changed its investment policies in late 2008), this fund lets you take advantage of the foreign tax credit, but unless you plan to stay in the fund a long time, the loads will eat into your return. And the foreign tax credit won't amount to much — maybe $15 on every $10,000 you have invested, so I wouldn't let that sway you one way or the other.
But more importantly, you have to be really committed to international indexing to find this fund appealing. It matches the EAFE index very closely, but that's not such a good thing given how poorly the index performs compared to many active managers.
Finally, it doesn't invest in emerging markets. If you still want to invest in this fund, a better choice might be the Europe Pacific ETF (VEA), which is a share-class of this fund and, because it trades like a stock, has no fees other than the brokerage cost to buy or sell. But why bother?
Vanguard Mutual Fund #7: Short-Term Treasury (VFISX)
I'll put it right up front: When it comes to investing in Vanguard bond funds, you can't go wrong with their short-term funds. Expenses are low, relative yields are high, and risk is minuscule. But although Short-Term Treasury (VFISX) did well in 2008, if the economy picks up, investor fear falls, or rates are raised due to inflation concerns, this fund could see a corresponding downward price swing.
I think a better bet is Short-Term Investment Grade (VFSTX). That's my favorite Vanguard fund at the short end of the yield curve. Formerly known as Short-Term Corporate, it is extremely safe, produces steady returns and offers some diversification that the Treasury and Federal funds don't.
The diversified portfolio responds to rising or falling interest rates less rapidly than Treasurys, meaning that it rises a bit slower when rates drop and falls a bit less when rates rise, since the excess yields protect investors and prices. Over time, a portfolio like this one will outperform a Treasury portfolio, as Short-Term Investment-Grade has.
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