Cut Rates, Concentrated Funds, and a Quiet Hire

Hello, and welcome to the IVA Weekly Brief for Wednesday, August 27.

There are no changes recommended for any of our Portfolios.

Any way you slice the data, Friday was a good day for investors. Stocks, bonds and real estate all moved higher:

• 500 Index (VFIAX): 1.5%
• SmallCap Index (VSMAX): 3.0%
• Total International Stock Index (VTIAX): 1.5%
• Total Bond Market Index (VBTLX): 0.5%
• Real Estate Index (VGSLX): 1.9%

The only Vanguard fund in the red? Market Neutral (VMNFX)—down just 0.1%.

So, what sparked the broad rally? One thing: Federal Reserve Chair Jerome Powell cracked the door open to a September interest rate cut.

That’s it.

Frankly, I’m skeptical that interest rate cuts are necessarily good news for markets. The Fed usually lowers interest rates because the economy is slowing. And a weaker economy isn’t great for corporate earnings. In fact, if history is a guide, the Fed’s first interest rate cut in a cycle has been more of a “sell” signal than a “buy” one.

That said, a September interest rate cut is not a done deal: Between now and then, we’ll see more jobs and inflation data, which could easily alter the Fed’s stance. Powell himself underscored that inflation remains a concern. Even if policymakers trim rates this fall, it may be a tactical adjustment rather than the start of a new era of easy money.

Of course, the President’s push to fire Federal Reserve Governor Lisa Cook adds an unusual wrinkle. If the White House gains more sway over Fed policy, the near-term direction is clear: lower short-term rates.

However, keep in mind that the Fed sets the fed funds rate; it does not control the entire bond market. Long-maturity bond yields can rise even as the Fed cuts interest rates. That’s what we saw in late 2024—while the fed funds rate fell from 5.5% to 4.5%, the yield on the 10-year Treasury rose from 3.6% to 4.8%.

My point is simple: Even if the President gets to put his finger on the Fed’s scale, that doesn’t guarantee lower bond yields across the board.

For more context, Premium members can revisit my two-part series from last year on Fed policy and how it shaped returns for stocks, bonds and cash—see here and here.

The takeaway? Don’t try to outguess the Fed (or the bond market). Instead, stick to a diversified portfolio—one that can weather an economic slowdown, an inflation flare-up or a burst of growth. Sure, you could place a bet on one outcome and maybe do better—but you could also do far worse.

Voting Against Diversification

Vanguard is asking shareholders of Health Care Index (VHCIX and VHT) and Financials Index (VFAIX and VFH) to approve a change in the funds’ status—from “diversified” to “nondiversified.”

I get it. At first glance, voting for your fund to “become nondiversified” sounds unsettling. After all, isn’t diversification supposed to be the whole point of an index fund?

Rest easy: Nothing changes in how the funds are managed or in what they own. This is about keeping the regulators happy while still tracking the indexes.

Here’s the issue: Under the Investment Company Act of 1940, which defines the rules for mutual funds (and ETFs), a 5% position is a large holding. If 25% of a mutual fund's assets are invested in those large holdings, it is no longer diversified.

Thanks to today’s market concentration—think mega-cap health care and financial stocks—those index funds are at risk of violating that technical definition of diversification.

So, Vanguard is simply gathering the votes it needs to update the paperwork to acknowledge that possibility. If they get the votes, the funds will continue to track their indexes as they have always done.

The bottom line: This is a compliance formality, not a fundamental shift in your fund.

Another Outsider

Vanguard has quietly brought Bill Stout on board as its new Head of Private Markets Strategy. I say “quietly” because, according to his LinkedIn page, Stout started in July—but Vanguard hasn’t made any fanfare about the hire.

Two things stand out:

First, this is yet another example of Vanguard willing to reach outside its own walls for senior talent. Stout was previously head of Nuveen’s global client group strategy and business development.

Second, his arrival underscores Vanguard’s determination to expand in private markets. As I’ve explained to Premium members (here), I remain skeptical that everyday investors need private funds in their portfolios. The fees are higher, the funds are less liquid (less easily traded), and the evidence that they deliver better results is mixed at best.

That said, the puck is moving toward private markets, and Vanguard clearly doesn’t want to be left behind.

Our Portfolios

Our Portfolios are showing positive returns for the year through Tuesday. The Aggressive Portfolio is up 8.6%, the Aggressive ETF Portfolio is up 11.1%, the Growth and Moderate Portfolios are up 7.9% and the Conservative Portfolio is up 6.6%.

This compares to a 10.5% gain for Total Stock Market Index (VTSAX), a 22.6% return for Total International Stock Index (VTIAX), and a 4.9% return for Total Bond Market Index (VBTLX). Vanguard’s most aggressive multi-index fund, Target Retirement 2070 (VSNVX), is up 14.2% for the year, and its most conservative, LifeStrategy Income (VASIX), is up 6.3%.

IVA Research

Yesterday, in Global Funds: Plenty of Options, Few Standouts, I analyzed Vanguard’s global stock funds and explained my ratings to Premium Members.

Until my next IVA Weekly Brief, have a safe, sound and prosperous investment future.