WEEKLY BRIEF | Long Duration, Two Ways

Hello, and welcome to the IVA Weekly Brief for Wednesday, May 20.

There are no changes recommended for any of our Portfolios.

Long-term assets are both working—and not working—this quarter.

Let me explain.

What’s working? Technology stocks. Information Technology ETF (VGT) is Vanguard’s best-performing fund this quarter by a wide margin, up 27.9% through Tuesday. In many ways, technology stocks are the ultimate “long-term assets.” Investors are often willing to pay high prices today based on the expectation of much larger profits tomorrow.

Yes, the likes of Apple, Microsoft and NVIDIA are enormously profitable today, but investors paid up for years before those profits arrived. And many of today's AI darlings are still burning cash in pursuit of future dominance. The bet is always on tomorrow, even when today looks pretty good.

Vanguard’s second-best-performing fund this quarter is PRIMECAP (VPMCX), up 19.2%. The PRIMECAP managers have always been willing to think years ahead. That long-term mindset hasn’t always been rewarding during the market’s recent obsession with mega-cap tech stocks, but their willingness to stick with holdings like Micron and Intel is paying off this year.

On the other side of the ledger, long-term bonds are struggling. Extended Duration Treasury ETF (EDV) and Long-Term Treasury ETF (VGLT) are Vanguard’s two worst-performing funds this quarter, down 5.4% and 3.2%, respectively.

Why are bond prices falling? Because investors worried about inflation have been selling bonds. Falling bond prices and rising yields go hand in hand.

The yield on the 30-year Treasury has climbed to 5.17%—its highest level in nearly two decades. The more closely watched 10-year Treasury yield, at 4.65%, isn’t quite as extreme—it’s in line with where it has traded for the past three years or so.

So, what should investors take away from all this?

First—and maybe this shouldn’t need saying—don’t expect technology stocks to keep gaining 30% every couple of months. Enjoy the rally while it lasts, but if tech stocks have grown into an outsized portion of your portfolio, this may be an opportunity to rebalance rather than double down.

Second, don’t let dramatic bond-market headlines shake you out of your plan. I saw one Bloomberg headline describe the recent move as “an intense selloff in government bonds.” Maybe by traders’ standards. But a 3% decline over a couple of months doesn’t qualify as “intense” in my book.

It’s also worth remembering that you don’t have to own the longest-maturity bonds, whose prices are the most sensitive to interest-rate swings. Total Bond Market Index (VBTLX) is down just 1.0% this quarter. Total World Bond ETF (BNDW) is off only 0.07%. And cash—measured by Federal Money Market (VMFXX)—is actually up 0.5%.

Will technology stocks keep soaring, or will the AI bubble burst? Will interest rates continue moving higher, or will inflation be “transitory” this time around?

If you make concentrated bets and answer those questions correctly, the payoff could be enormous. But if you get them wrong, the damage to your portfolio could be just as significant.

The IVA Portfolios are built for investors who'd rather not have to answer those questions perfectly—and this year’s results suggest that approach is working.

Acquiring Vanguard

If you’ve got four hours to spare, the Acquired Podcast—which “tells the stories and strategies of the world’s greatest companies”—dropped a deep dive on Vanguard this week. You can find it here or on your favorite podcast platform.

I’m only halfway through, so I’ll reserve a full verdict. But hosts Ben Gilbert and David Rosenthal have clearly done their homework, and any Vanguard investor should enjoy the ride.

The section I found most interesting covers the transition from Jack Bogle to Jack Brennan. Their argument: founders make companies special, but at some point, you need someone more operationally "flexible" to carry things forward. It's a pattern they’ve observed after profiling over 200 companies—and it makes me wonder if there’s a line to draw to Vanguard hiring its first outside CEO, Salim Ramji, two years ago.

I paused somewhere in the early 2000s, and I’m genuinely curious to hear what Gilbert and Rosenthal make of the past quarter-century as Vanguard climbed to the top of the asset management world.

That said, a few factual stumbles are worth flagging.

On Total Stock Market Index (VTSAX), the hosts imply that Vanguard built the fund specifically to avoid paying S&P a licensing fee. Not quite. Vanguard has never paid S&P for that fund—but it has paid licensing fees to Dow Jones, then MSCI, and now CRSP/Morningstar as the benchmark changed. (The upcoming addition of "Morningstar" to the fund's label is, at least in part, about keeping that fee low.)

On the Partnership Plan, the hosts credit Jack Brennan with creating the internal profit-sharing program in the late 1990s. In fact, it was Bogle himself who launched it—back in 1984.

Neither error is a dealbreaker. Enjoy the episode, but keep a grain of salt handy.

A Baillie Gifford-run ETF Is Coming

Baillie Gifford is converting two mutual funds—International Concentrated Growth and Long-Term Global Growth—to ETFs on June 1.

Why does that matter to Vanguard investors? Because Baillie Gifford already manages money for Vanguard—and these ETFs look a lot like strategies Vanguard investors already recognize.

Baillie Gifford International Concentrated Growth resembles the sleeve the Scottish firm runs inside International Growth (VWIGX). However, its closest pure-play Vanguard cousin is Advice Select International Growth (VAIGX), which is only available through Vanguard Personal Advisor services.

Long-Term Global Growth follows a similar high-conviction growth approach, but with a global mandate rather than an international-only one. Vanguard doesn’t currently offer a direct mutual fund equivalent.

A few things stand out here.

First, if you like the idea of a concentrated version of International Growth but don’t want to sign up for Vanguard’s advice services, you’ll soon have access to that strategy in an ETF wrapper.

Second, this is another sign of how quickly the active ETF landscape is evolving. Baillie Gifford and PRIMECAP Management—two of Vanguard’s largest sub-adviser relationships—are not waiting on Vanguard to jump into the actively managed ETF waters.

That doesn’t mean we won’t see an ETF share classes (or versions) of funds like International Growth or PRIMECAP (VPMCX). But it underscores that active managers increasingly want the ETF structure, whether Vanguard moves first or not.

Our Portfolios

Our Portfolios are showing solid returns for the year through Tuesday. The Aggressive Portfolio is up 8.1%, the Aggressive ETF Portfolio is up 7.4%, the Growth Portfolio is up 7.2%, the Moderate Portfolio is up 8.2% and the Conservative Portfolio is up 4.7%.

This compares to a 7.7% gain for Total Stock Market Index (VTSAX), a 9.8% return for Total International Stock Index (VTIAX), and a 1.0% decline for Total Bond Market Index (VBTLX). Vanguard’s most aggressive multi-index fund, Target Retirement 2070 (VSNVX), is up 7.7% for the year, and its most conservative, LifeStrategy 20/80 (VASIX), is up 1.1%.

IVA Research

Yesterday, I argued that aggressive investing doesn't have to mean complicated investing. Premium Members can read Aggressive Investing Made Simple—a full review (with Buy, Hold and Sell ratings) of Vanguard's small-stock fund lineup.

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