Solving the Puzzle of Vanguard Pacific Fund's Mysterious Gains

Gary Gordon submits: In 2007, year-to-date, the Vanguard Pacific Fund (VPL) has garnered nearly 7%. With 70% of the investment representing Japanese companies, VPL isn't exactly diversified across the Pacific region or the Pacific Rim. The iShares MSCI Japan Index (EWJ) is up a mere 3% in the same time frame. Although there seems to be a lot of faith in a recovering Japanese economy, particularly with respect to investment dollars flowing into Japanese funds, EWJ hasn't been all that impressive so far.

I have found myself wondering, though... how has the VPL fund managed to outpace the EWJ by 4 percentage points this year? Does VPL's 20% weight in Australia give it enough juice to make up 4 percentage points?

The answer... after doing the math... is "Yes!"

On the year, the iShares MSCI Australia Index (EWA) is up 20% through 6/15/07. It turns out that the VPL's 20% weighting to Australia companies (and Australia's 20% YTD gains) boosts VPL's 2007 return up to 6.5%.

The final .50% discrepancy might be attributable to VPL's superior dividend; VPL offers 2.1% annually whereas EWJ serves up an anemic .7% annual dividend. Moreover, even though Singapore and Hong Kong combine for just 10% of the Vanguard Pacific's return, even the small allocation to these other countries has helped propel Vanguard Pacific higher.

Clarifying this mystery has done several things for me. First and foremost, it reinforces the notion that an investor MUST check under the hood. You cannot buy an investment on the name alone (e.g., Pacific, large cap, international, etc.). Second, and more surprisingly, even small weightings can sometimes have substantial impact. In this instance, a healthy does of Australia's commodity king BHP Biliton (BHP) has given a major lift to Vanguard's mysterious Pacific Fund.

VPL, EWJ, EWA 1-year chart

Comments

[cstendig]

I cannot understand why VPL Vanguard's Pacific Fund is being compared to EWJ I-shares ALL JAPAN fund !! Wouldn't comparison be more accurate compared to EPP I-shares Pacific X-Japan fund????

[Tomaz_Korosec1]

you missed the point, the point here is how could one etc that has mostly japan be up more then just japan etc itself and the article explains why that is,..