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Performance report: Vanguard funds prospered in robust markets

August 07, 2014

Financial markets withstood multiple challenges on their way to generally robust results for the 12 months ended June 30, 2014. Stocks posted positive or flat returns in 10 of the period's 12 months, and the sagging bond market unexpectedly reversed course when 2014 began.

Geopolitical tensions in the Middle East and Ukraine, questions about China's slowing economy, severe winter weather in the United States, and uncertainty about the Federal Reserve's monetary policies loomed over the market's progress at various times.

Ultimately, corporate profits and investors' optimism that economic expansion would support further earnings growth boosted markets. Stimulus efforts in Europe and Asia also provided a lift along with the low-interest rate environment in the United States, even as the Fed has slowly withdrawn its monthly stimulus since January.

The broad U.S. stock market advanced 25.03% over the fiscal year, while international stocks, in aggregate, returned 22.50%. Developed markets in Europe climbed nearly 30%, more than double those of developed markets in the Pacific region and emerging markets.

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The broad U.S. taxable bond market returned 4.37%. Almost all of the gains came in the fiscal year's second half as bond prices, in general, unexpectedly rose and yields fell despite regular withdrawals of stimulus. (Bond prices and yields move in opposite directions.)

International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned 9.42% as investors cheered the stimulus efforts in Europe and Asia and gained more confidence in the creditworthiness of financially troubled nations.

While the Fed's policies have helped stimulate the U.S. economy and stabilize and support the stock and bond markets, the Fed's target of 0%–0.25% for short-term interest rates continued to contain money market and savings account returns.

Making sense of money markets

In a historic move, the Fed first anchored its short-term interest rates near zero in December 2008. And that's where those rates have remained as the U.S. economy has slowly rebounded from the recession and financial crisis.

Minutes from the Fed's June policy meeting revealed its massive bond-buying program would end in October as well as much dialogue about the future of short-term interest rates. In March, the Fed officials said it was "outdated" to tie interest rates to a 6.5% unemployment rate target, and it is now taking a more qualitative, comprehensive approach. Most Fed officials expect to start raising interest rates in 2015.

Vanguard understands how difficult this low- or almost "no rate"environment has been for investors in money market funds. Still, money market funds provide a unique combination of liquidity and safety and play a valuable role in an investment program.

"Ultimately, the Fed is looking down the road, and they're starting to see better signs," said David Glocke, the principal and portfolio manager who heads the taxable money markets in Vanguard Fixed Income Group. "So we feel a lot better about market conditions, and at some point the Fed will turn around and raise interest rates, something money market investors I'm sure would be appreciative of."

Long-term results look good

Vanguard funds have produced strong returns relative to competitors over longer periods of time. As the graph below illustrates, over the past 5- and 10-year periods, 80% and 91% of our funds, respectively, have outperformed the returns of their peer-group averages. The graph also shows the percentage of Vanguard funds in each major asset category that exceeded the average returns of their competing fund peer groups (as determined by Lipper) over the 1-, 3-, 5-, and 10-year periods ended June 30, 2014.

Vanguard funds that outperformed their peer group averages

(Periods ended June 30, 2014)

  1 year 3 years 5 years 10 years
All Vanguard funds: 77%
(269 of 350 Vanguard funds outperformed their peers; 19,702 funds in peer category for this period)
(277 of 327 Vanguard funds outperformed their peers; 16,398 funds in peer category for this period)
(210 of 263 Vanguard funds outperformed their peers; 13,743 funds in peer category for this period)
(171 of 188 Vanguard funds outperformed their peers; 8,032 funds in peer category for this period)
Money market funds: 90%
(9 of 10 Vanguard funds; 950 funds in peer category)
(10 of 10 Vanguard funds; 922 funds in peer category)
(10 of 10 Vanguard funds; 870 funds in peer category)
(10 of 10 Vanguard funds; 676 funds in peer category)
Stock funds: 82%
(175 of 214 Vanguard funds; 11,512 funds in peer category)
(181 of 207 Vanguard funds; 9,739 funds in peer category)
(141 of 165 Vanguard funds; 8,337 funds in peer category)
(99 of 109 Vanguard funds; 5,002 funds in peer category)
Bond funds: 68%
(67 of 99 Vanguard funds; 3,920 funds in peer category)
(63 of 84 Vanguard funds; 3,121 funds in peer category)
(37 of 63 Vanguard funds; 2,196 funds in peer category)
(45 of 51 Vanguard funds; 1,583 funds in peer category)
Balanced funds: 67%
(18 of 27 Vanguard funds; 3,320 funds in peer category)
(23 of 26 Vanguard funds; 2,785 funds in peer category)
(22 of 25 Vanguard funds; 2,340 funds in peer category)
(17 of 18 Vanguard funds; 771 funds in peer category)

Results will vary for other time periods. Only funds with a minimum 1-, 3-, 5-, or 10-year history, respectively, were included in the comparison. (Source: Lipper, a Thomson Reuters Company.) Note that the competitive performance data shown represent past performance, which is not a guarantee of future results and that all investments are subject to risks. For the most recent performance, visit our website at vanguard.com/performance.

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  • All investing is subject to risk, including the possible loss of the money you invest.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
  • An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
  • Foreign investing involves additional risks, including currency fluctuations and political uncertainty. Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.
  • Market data source: Vanguard, based on market benchmarks. U.S. stocks represented by the Dow Jones U.S. Total Stock Market Float Adjusted Index. International stocks represented by the FTSE Global All Cap ex US Index. Bonds represented by the Barclays U.S. Aggregate Bond Index.
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