Letter: Investments tricky
Jack Real’s recent letter to the editor lamenting the opportunity cost of Garfield County’s reserve fund not being invested in a Vanguard GNMA (Government National Mortgage Association) bond fund contains several inaccuracies based on his misunderstanding of how a mutual fund is constructed and how its performance is calculated.
It is incorrect to state that the fund is backed by the full faith and credit of the U.S. government. The fund’s individual GNMA holdings are insured; however, the actual bond fund itself is not. A bond fund typically invests in securities that do not have U.S. government backing, therefore the fund cannot be “100 percent backed.”
Using Morningstar analysis, a look at the Vanguard GNMA fund (VFIIX ticker symbol) indicated that as of June 30, 2016, 4.58 percent of the fund was invested in stocks and 1.82 percent in “other” securities, mostly derivatives. These investments are not backed by the full faith and credit of the government.
Additionally, a bond mutual fund’s performance is based on yield, plus the individual fluctuation of the portfolio’s value (reflected in the daily net asset valuation) which generates the fund’s “total return.” At times, this total return can be negative over a certain time period. Once again, using Morningstar analysis, the total return of VFIIX in 2013 was negative 2.23 percent.
While Mr. Real is correct that over his stated time period (assuming no withdrawals from the fund and ignoring tax implications) an investment in VFIIX would have realized an investment return in excess to his 0.59 percent quoted actual performance, the citizens of Garfield County should not be mislead regarding the risk of the CORA data team’s suggested investment strategy. However, let’s have Vanguard give the last word based on this “plain talk about risk” entry from Vanguard’s own VFIIX mutual fund profile:
“An investment in the fund could lose money over short or even long periods. You should expect the fund’s share price and total return to fluctuate within a wide range, like the fluctuations of the overall bond market.”
N. Guy Eniquoc
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