Hello, this is Jeff DeMaso with the IVA Weekly Brief for Wednesday, November 30th.

There are no changes recommended for any of our Portfolios.

I have a lot of Vanguard news to cover today, as well as a few thoughts on the economy and markets.

First, though you wouldn’t necessarily think so by reading the headlines, the kink in the global supply chain has largely been smoothed out. While China’s Zero-COVID policy and the protests in response risk disrupting supplies again, it hasn’t happened yet. In the meantime, consider that at the start of the year there were over 100 cargo ships waiting outside of the Port of Los Angeles for a berth to unload. Today, there are zero ships waiting to unload. The backlog has been cleared! That’s good news for the economy, for retailers and for consumers.

Second, I wrote an article last week for Premium Members—Down, Not Out—where I explained why I didn’t think the classic balanced portfolio (60% stocks and 40% bonds) was dead. As Dan and I discussed the topic further he asked a perceptive question: Where are all the articles about the death of the 40/60 or 20/80 portfolios?

The fact is that there has been very little difference in returns this year for stock/bond investors regardless of how much they have invested in either of the two asset classes. Through last night’s close Total Bond Market Index (VBTLX) has dropped 13.2% while Total Stock Market Index (VTSAX) has fallen 17.1%. That’s close enough that even without doing the math you can see that no matter how an investor mixed and matched, well, the results were about the same. So, if the 60/40 portfolio is dead, then surely approaches that allocate even more heavily to bonds are toast too.

Consider that LifeStrategy Growth (VASDGX), which is an 80% stock and 20% bond portfolio, is off 15.8% this year through Tuesday, while LifeStrategy Income (VASIX), a 20% stock and 80% bond portfolio, is down 13.0%. A difference of less than three percentage points is not exactly what you’d expect during a bear market. But that’s where we find ourselves today.

On another note, let’s turn to Malvern, where, for all the billion dollars or more that Vanguard says it’s spending on technology, the company can’t seem to catch a break with the people who really matter—its customers.

J.D. Power ran a survey over the summer ranking client satisfaction with wealth managers’ mobile apps. J.P. Morgan and Schwab were neck-and-neck for the top spot. Bringing up the rear? You guessed it—Vanguard. You can bet your bottom dollar Vanguard’s not going to promote this J.D. Power survey despite the fact that earlier this year Vanguard ranked highest among self-directed investors. Maybe we’re just surveyed out.

Speaking of mobile apps, Dan and I received emails from Vanguard this week telling us to “Download the ProxyVote App and Vote your Shares.” I guess the idea is to make it easier to vote your mutual fund proxies. Well, Dan gave it a try and it refused to verify his email address. He finally tried his phone, rather than his laptop, and the tech gods smiled. I know it’s not Vanguard tech—it’s run by Broadridge Financial Inc.—but it’s definitely Vanguard-recommended tech. When are they going to get it right the first time?

While Vanguard has a long road to travel to improve its technology—I’m not holding my breath—it can’t go back and undo the 2021 mess it made for shareholders of its Target Retirement funds.

To recap, in December 2020, Vanguard lowered the minimum on the institutional versions of its Target Retirement funds from $100 million to just $5 million. As you’d expect (and as Vanguard intended), many investors—and really, we’re talking about mid-sized 401k plans with millions of dollars in assets—shifted from the higher-cost retail versions of the Target Retirement funds to the lower-cost and now accessible institutional funds.

That on its own isn’t a big deal—moving to a cheaper version of the same fund is a no-brainer. The problem is that all those investors moving out of the retail funds forced them to sell a LOT of securities and realize a LOT of capital gains. Now, capital gains being paid out by a fund in your 401(k) isn’t generally a problem either. But it turns out that many shareholders also held the Target Retirement funds in taxable (brokerage) accounts—and were left to cover a really big tax bill.

Then, to rub salt in that wound, in September 2021, Vanguard merged the retail and institutional Target Retirement funds—something it could have done in 2020 to avoid the mess. The damage was done, though. It was too little, too late for people who held the retail Target Retirement funds in a brokerage account.

Roughly a dozen of those investors—who collectively estimate they paid over $250,000 in unnecessary taxes thanks to Vanguard’s handling of the situation—have filed a class action lawsuit against Vanguard. They are demanding a jury trial and are claiming a breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, gross negligence, a breach of the covenant of good faith and fair dealing and unjust enrichment, as well as violating a host of consumer protection acts.

The entire filing makes for some juicy reading. Here are two quotes and claims that caught my eye:

“At best [Vanguard’s] decision was a dereliction of duty by gross neglect. At worst, it was a callous, intentional sacrifice of one group of shareholders to boost earnings.”
“Across all damaged investors, Plaintiffs estimate that harm amounts to hundreds of millions of dollars or more.”

Dan and I have, over the years, called for Vanguard to use lower-cost share classes of its index funds in its fund-of-funds—like the Target Retirement and LifeStrategy funds. Now Vanguard has made a complete mess of it—and will seemingly pay a price for it—but got where we thought they should have gone long ago with its Target Retirement funds. I’m still waiting for Vanguard to move away from the Investor shares in the LifeStrategy funds. Hopefully they’ve learned some lessons.

While lower costs are at the center of the Target Retirement story, let’s not forget that sometimes fees go up at Vanguard. Oisin Breen covered this topic well at RIABiz.

Also, a reminder that U.S. Liquidity Factor ETF (VFLQ) is no longer liquid because, well, it’s been liquidated, and cash returned to shareholders as of November 28. As I noted after the September announcement to shutter the fund, U.S. Liquidity Factor ETF was the worst performing of Vanguard’s factor ETFs. It also had attracted very few investor dollars. It was an academic product that didn’t live up to the backtests that inspired Vanguard to launch the ETF in the first place. Good riddance. I doubt the fund or strategy will be missed.

Finally, our Portfolios are showing improved (and index-beating) returns for the year through Tuesday. The Aggressive Portfolio is down 14.0%, the Growth ETF Portfolio is down 16.6%, the Growth Portfolio is off 12.9% and finally the Moderate Portfolio has declined 10.3%. Chalk it up to strong active managers and a rebound in health care stocks. Dividend Growth (VDIGX) has been delivering all year, down just 4.6% as of Tuesday night. Health Care ETF (VHT) has also held up relatively well, off just 6.1% this year. But over the past two months, International Growth (VWIGX) has led the performance charge—though the fund still has a lot of lost ground to make up on the year.

This compares to a 17.1% drop for Total Stock Market Index (VTSAX), a 16.1% decline for Total International Stock Index (VTIAX), and a 13.2% decline for Total Bond Market Index (VBTLX). Vanguard’s most aggressive multi-index fund, Target Retirement 2065 (VLXVX), is down 16.1% for the year and its most conservative, LifeStrategy Income (VASIX), is down 13.0% for the year. Vanguard’s poster child for diversified portfolios, representing the firm’s best thinking, Managed Allocation (VPGDX) is down 8.4%.

Until my next Weekly Brief, this is Jeff DeMaso wishing you a safe, sound and prosperous investment future.