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No. of Recommendations: 8
Here is a new fund that can give new investors diversification at a very low cost. They will even rebalance for us and at a .44% expense ratio!...

"The new fund, Vanguard® Diversified Equity Fund, will provide investors with a diversified, single-fund option offering broad exposure to investment styles and market capitalizations."


Okay, remember those words. We'll come back to them. Here are the funds:

Vanguard Growth and Income Fund 20%
Vanguard Morgan™ Growth Fund 15%
Vanguard U.S. Growth Fund 15%
Vanguard Windsor™ Fund 15%
Vanguard Windsor II™ Fund 15%
Vanguard Explorer™ Fund 10%
Vanguard Mid-Cap Growth Fund 5%
Vanguard Capital Value Fund 5%


Do you know what those funds are, without looking? Neither do I. How do we find out? More on that below.

'“Vanguard Diversified Equity Fund is being offered to serve as a 'starter fund' for investors seeking a broadly diversified, low-cost equity portfolio,” said Vanguard Chairman Jack Brennan. “Investors are increasingly seeking simplified solutions, and this new Vanguard fund-of-funds provides a ready-made stock portfolio in a single vehicle.”'

Let's remember those words, too.

First let's see what those funds are. All data comes from Morningstar, and the classification of the funds is their opinion; it does not always match the category claimed by the Fund company or other analysts.

Vanguard Capital Value: Large Value
Vanguard Explorer: Small Growth
Vanguard Growth & Income: Large Blend
Vanguard Mid Cap Growth: Mid-Cap Growth
Vanguard Morgan Growth: Large Growth
Vanguard U.S. Growth: Large Growth
Vanguard Windsor: Large Value
Vanguard Windsor II: Large Value

Thus, by Morningstar's account and the weightings you reported, 85% of this "diversified" fund is composed of large-cap stocks! Yow. Okay, but are they any good? Well, M* doesn't give any of them 5 stars, and one is rated as low as TWO stars. Can you guess which one? (Trivia question answer at the bottom of this message.)

Now, Mr. Brennan says this is a "starter fund," which is mutual fund code for "something we sell to people with no experience or knowledge." Luckily we're here to shed light. Like, what's the difference between a "growth" investing style and a "value" style? If you don't know, I won't tell you, you'll have to look it up. Consider it homework.

But I will tell you that a "Blend" is supposedly sort of midway between Growth and Value. So without looking anything up, you can see that this portfolio has 3 Large Value, 2 Large Growth, and 1 Large Blend. Why go to all the trouble of buying the separate funds, when the total holdings more or less end up being a Blend anyway? All this "diversification" ends up putting you back in the middle of the style box, so you might as well just own the Big Cap blend fund and skip all the others.

Hey, let's explore that idea. Vanguard Growth & Income (VQNPX) is rated four stars. Its expense ratio is .42%. It has lost a little money on a five year basis and so far this year -- but at least, in all these time frames, it has beaten the performance of the S&P 500 index.

Okay, that's better than the two star fund for sure. But how does it compare to the idea of holding that whole "fund of funds?" Let's ask Morningstar to do the math. This weighted basket of funds, when averaged out, gave the following total returns:
Last 10 years, +10.81% (note, not all funds are ten years old)
Last 5 years, -1.79%
Last 3 years, +3.39%
Last 12 months, +9.62%.

Compare to VQNPX:
Last 10 years, +11.92%
Last 5 years, -2.60%
Last 3 years, +3.62%
Last 12 months, +10.52%

VQNPX is a big-cap blend that has beaten the "blend" of big-cap funds Vanguard is pitching here -- and did it at a lower expense ratio! So what's the point of this "fund of funds" anyway? None that I can see.

The most offensive thing about this "simplified" offering is that it depends on the buyers being simpletons. Brennan calls it "broadly diversified" which is an insult to the intelligence and perhaps ought to be reported to the FTC and SEC because it is so glaringly false.

Morningstar has something called an "X-ray" feature that tells a lot. If one X-rays this "fund of funds" portfolio, one learns that it is composed of 91% US stock funds. That is NOT diversified! But wait, let's check these 8 funds for stock overlap.

Citigroup is owned by 6 funds. It comprises 2.5% of the total.
Bank of America is owned by 4 funds, comprises 1.7% of the total.
Pfizer is owned by 5 funds, comprises 1.2% of the total.
IBM is owned by 5 funds, comprises 1.1% of the total.
ExxonMobil is owned by just 2 funds, but comprises 1.1% of the total.
Wellpoint is owned by 5 funds, comprises 1.1% of the total.
Microsoft is owned by 5 funds, comprises 1.0% of the total.
Tyco is owned by 3 funds, comprises .9% of the total.

Eight stocks make up 10% of the total portfolio. There are dozens of stocks that are owned by 3 or more of those 8 mutual funds. Again, I say: that is NOT "diversified!"

I suggest that anybody who cares take some of the funds that have been discussed here recently, chuck them into a portfolio, and see what kind of overlap results. I can't spare the time to do the experiment, but here's a selection of funds people have discussed that would be interesting to test together: FBRVX, PRPFX, TBGVX, OAKEX, SGIIX, TWEIX and VTSMX.

One should find SOME overlap because VTSMX is a "total market" index fund and supposedly owns one of everything you'd find in any other domestic stock fund. But the overlap will be small because there are so many stocks in VTSMX. A portfolio like that would give you exposure not only to stocks from all sizes of U.S. companies, but also to multiple international markets, as well as some precious metals, some bonds and and even foreign currencies, I think.

Now, THAT is "diversified!"

And consider, these are funds that have been discussed by members of this board in the past month or so. Nothing special about them beyond that. All I did is chuck them into one message. But I bet you dollars to donuts (whatever that means) that if you put them in a "basket" it would beat that Vanguard fund handily, and that when combined, it would also be less volatile because of its broad diversification. That is the very goal of diversification, and the Vanguard fund is so concentrated that it can't help but move in the same direction as the broad market in the U.S., especially the big-cap part of the market.

You said that Vanguard would "rebalance" it for you -- I guess you mean they would buy and sell shares in the component funds to keep those percentages listed at the outset. Boy, that has to be the most meaningless service I can imagine. In effect, they will sell one fund with a bunch of IBM and Pfizer and buy you some other fund with a bunch of IBM and Pfizer. That is NOT what people normally mean by "rebalancing!" Ah well, I sure hope this helps somebody somewhere.
:-)

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Trivia Answer: Vanguard U.S. Growth VWUSX is rated two stars.
Over five years it has returned -16.38%;
over three years -4.27%; and
so far this year it has returned -6.24%.
All these levels are well below the performance of the S&P 500 index. For the privilege of letting them throw your money away, they will charge you an expense ratio of .53%. It's not as if Vanguard hasn't noticed how bad the fund stinks. They've changed its management twice in the past five years -- but it hasn't belped. Caveat Emptor!
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