Do You Own Vanguard’s Worst Mutual Funds?
| Despite turbulent economic news and a volatile market, I still say the Vanguard family of mutual funds is the best place to build long-term wealth.But 8 out of 10 Vanguard investors who invest there settle for much lower profits than they should. In fact, some Vanguard mutual funds that made sense as recently as a few months ago are suddenly profit pitfalls.
Which ones are they? If you own any of these four Vanguard funds, sell them now! If not, avoid them at all costs. |
 Best-Kept Secrets at Vanguard Revealed |
#1 – Growth Equity (VGEQX)
| Turner Investment Partners ran Growth Equity () until 2009, and their high-turnover earnings momentum strategy was bad news for shareholders. The fund plummeted to a terrifying depth of -69.2% in the bear market of 2007-2009, and in a rolling returns comparison with its benchmark, the Russell 1000 Growth Index, it 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. 2009 was good, but nothing to write home about given the competitive performance of funds like Growth Index (). | Best-Kept Secrets at Vanguard Revealed |
#2 – Precious Metals & Mining (VGPMX)
| A bull run in metals can make a fund like Precious Metals & Mining () 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. |
Best-Kept Secrets at Vanguard Revealed |
#3 – STAR LifeStrategy Income (VASIX)
| STAR LifeStrategy Income () 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. |
Best-Kept Secrets at Vanguard Revealed |
#4 – Diversified Equity (VDEQX)
| Diversified Equity () 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. 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. | Best-Kept Secrets at Vanguard Revealed |
#5 – U.S. Growth (VWUSX)
| Despite the addition of what I believe is competent management in William Blair & Co., U.S. Growth () remains a turkey, burdened in part by the ham-handed stock picking at AllianceBernstein, which took over management in June 2001 and still runs almost 70% of the fund’s assets. Consider that the fund, which once had $22 billion in assets, has less than $4 billion now.I’d love to be able to recommend this fund, because its minimum is just $3,000 and there are no extra fees or loads burdening shareholders. But so far there’s no reason to. If you want a well-rounded, diversified large-cap growth fund, use Growth Index or Social Index, or consider a step up to a fund run by the team at PRIMECAP Management. But stay away from this has-been. | Best-Kept Secrets at Vanguard Revealed |
#6 – Tax-Managed International (VTMGX)
| Tax-Managed International () 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 has no significant investments 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? |
Best-Kept Secrets at Vanguard Revealed |
#7 – Short-Term Treasury (VFISX)
| I’ll put it right up front: When it comes to investing in Vanguard bond funds, you generally 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 () did well in 2008, a combination of a recovering economy and reduced investor fear left Treasury funds in a somewhat precarious position. Short-Term Treasury was the only one to end 2009 in positive territory, with a 1.4% gain — the lowest of any of the short-term taxable funds at Vanguard. It could be worse if the Fed begins tightening rates.I think a better bet is Short-Term Investment Grade (). 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. |
Best-Kept Secrets at Vanguard Revealed |
