The fund tracks the Nasdaq International Dividend Achievers Select Index, which targets large- and mid-cap stocks from developed and emerging markets that have increased their dividend payments for seven consecutive years. It applies additional filters to eliminate stocks that may not be able to sustain their dividend growth. The index weights its holdings by market capitalization to help mitigate turnover and trading costs. It also limits Individual stocks to 4% of the portfolio at the annual rebalance to improve diversification.
Screening for stocks with seven years of dividend growth is a strict hurdle that provides a big advantage. It indirectly targets companies that not only have the capacity to make dividend payments but also a willingness to do so. But this screen does have some downsides. It doesn’t consider other metrics, such as debt levels and analyst earnings growth estimates, which may be indicative of a firm’s capacity to continue making payments. Additionally, if a company were to miss a single dividend payment it must wait seven years before it is welcomed back.
Overseas companies that have a history of increasing their dividend payments are also likely to be those that have been consistently growing profitably. These stable businesses should be less volatile than the broader market and are likely to hold up better during market downturns.
This strategy has a short but promising track record. Its focus on high-quality stocks with consistent dividend growth helped it beat the MSCI ACWI ex USA Growth Index on a risk-adjusted basis from its launch in February 2016 through May 2019. Its relatively low fee is another advantage that should aid its category-relative performance.
| Daniel Sotiroff 06/25/2019
This fund targets companies with a strong history of raising their dividend payments, which leads to a portfolio of large stable firms that should provide solid performance. It earns a Positive Process Pillar rating.
The managers use full replication to track the Nasdaq International Dividend Achievers Select Index. This benchmark starts with all stocks in the Nasdaq Global Ex-U.S. Index, which includes companies listed in both developed and emerging markets. The process excludes REITs and firms that are currently working through bankruptcy proceedings. It applies additional liquidity screens to ensure potential holdings are investable. The methodology further narrows down its selection to companies that have a seven-year history of increasing regular dividend payments. Nasdaq applies some additional proprietary filters intended to improve the fund’s chances of holding companies that will continue to grow their dividends. The index weights stocks that meet these criteria by market capitalization, subject to a 4% maximum weighting at the time of the rebalance. The index reconstitutes annually in March.
The focus on dividend growth causes this portfolio to hold stocks priced at higher multiples, but with higher profitability compared with the MSCI ACWI ex-U.S. Index. The dividend yield on this fund is lower than those that focus specifically on high-yielding stocks, as well as the benchmark. As a result, this fund should not be considered for those seeking a higher level of income relative to a cap-weighted index.
The focus on growth causes this portfolio to hold stocks from stable sectors such as consumer staples. Top holdings include major multinational firms including Nestle, L’Oreal, and Unilever. Companies like these tend to be less volatile than the broader market and should hold up better during market downturns. Holdings are weighted by market capitalization, which emphasizes the largest companies that have consistently raised dividends. The average market capitalization of this fund’s holdings is one of the largest in the foreign large-growth Morningstar Category. This approach also promotes low turnover, which typically lands in the high single digits.
Like many of its peers, the fund has some exposure to emerging markets, and they represent about 25% of the portfolio. They carry greater risk than their developed-market counterparts, including greater political risk, underdeveloped infrastructure, and regulatory oversight.
| Daniel Sotiroff 06/25/2019
This strategy has potential, but its track record has not demonstrated a consistent ability to distinguish it from its category peers. It earns a Neutral Performance Pillar rating. Its total return has kept pace with the MSCI ACWI ex USA Growth Index, mildly beating this benchmark by 25 basis points annually from its launch in February 2016 through May 2019.
The portfolio’s emphasis on businesses with long-term dividend growth tilts its holdings toward stable businesses that tend to be less risky than the market. Consequently, the fund’s standard deviation has run about 5% lower than the MSCI ACWI ex USA Growth Index. It also held up better than the market during the 2018 drawdown, when it beat the benchmark by 3.1 percentage points for the year.
The fund’s tracking error appears high because Vanguard uses a fair value pricing strategy to update stale stock prices and protect investors from arbitrage activity. Its total return from February 2016 through May 2019 was in line with its target index after accounting for its expense ratio, indicating that the managers are fulfilling the fund’s index-tracking mandate.
| Daniel Sotiroff 06/25/2019
This well-supported team earns a Positive People rating. The portfolio managers have access to Vanguard’s global infrastructure and portfolio management technology as members of Vanguard’s equity index group.
The fund is comanaged by Michael Perre and Justin Hales. Perre is a principal in the Vanguard equity index group. He has been with Vanguard since 1990 and has worked in various roles at Vanguard, including accounting, securities lending, and trading. Hales is a portfolio manager in Vanguard’s equity index group and is responsible for daily trading and portfolio management. He has been with Vanguard since 2004. While these are the only two listed managers, they have access to Vanguard’s global trading desks, enabling them to make the most efficient transactions in various global markets.
Vanguard’s compensation structure aligns managers’ interests with investors’. The managers are compensated with a bonus that factors in the gross, pretax performance of the fund relative to its objectives. This includes the managers’ record of tracking their benchmark index over the prior 12 months.
The Vanguard Group is the world’s biggest provider of open-end funds and its second-biggest provider of exchange-traded funds. Innovative and iconoclastic from its mid-1970s origins, the firm’s mutual ownership structure, commitment to low fees, and sensible active and passive investment strategies are hallmarks that support its Positive Parent rating.
Vanguard is committed to serving all investors, not just its own. Indeed, the firm celebrates when its entry into an asset class prompts rivals to lower their fees to remain competitive, as occurred when Vanguard launched index funds in London in 2009 and factor-based strategies in the United States in early 2018.
New CEO Tim Buckley, Vanguard’s fourth, faces the challenge of expanding the firm’s mission to non-U.S. investors, who currently account for less than a tenth of the firm’s $5 trillion in global assets under management. He must also navigate the tension between Vanguard’s burgeoning discretionary asset-management business, Personal Advisor Services, and financial advisors who may feel threatened by the firm’s efforts to lower the cost of investment advice. Perhaps Vanguard’s greatest challenge, though, will be keeping pace with its own growth, especially in overcoming the service problems that have bedeviled the firm the past few years. Vanguard’s 2017 implementation of client-experience testing labs should help the firm improve there, too.
| Daniel Sotiroff 06/25/2019
This fund’s expense ratio is one of the lowest in Morningstar’s foreign large growth category, so it earns a Positive Price Pillar rating. In November 2018, Vanguard closed the Investor share class and lowered the investment minimum on the Admiral share class to $3,000 from $10,000 ($3,000 was the minimum for the outgoing Investor share class). The Admiral shares and ETF both cost 0.25%. The Admiral shares lagged the fund’s target index by 19 basis points annually from its launch in February 2016 through May 2019. Vanguard’s fair value pricing strategy was a modest tailwind that allowed the fund to make up for a fraction of its expenses, but investors should not expect this advantage to persist.