Vanguard’s economic and market outlook · 2015-06-09 · Vanguard’s euro area dashboard of...

For Financial Advisors and Institutional Investors Only. Not for Public Distribution.

Vanguard’s economic and market outlook Paul Bosse, CFA Principal The Vanguard Group, Inc.’s Investment Strategy Group June 2015

2 For Financial Advisors and Institutional Investors Only. Not for Public Distribution.

Themes and outlook

• World: Frustratingly fragile

• Canada: Benefits from U.S. growth, but negative implications of oil price declines

• U.S.: Resilient with slightly above 2% trend growth, but poor outlook overseas hurts

• Europe: Still weak, but improving outlook fuelled by QE, euro weakness and oil prices

• China: Permanently slower, but hard landing unlikely

• Japan: Growth rebound constrained by VAT. Should fall short of Abenomics goals

• Global deflationary pressures continue, but stable oil prices and global QE help

• Weaker loonie is temporary effect and unlikely to affect trend growth

• U.S. wage growth should rise, but strong dollar may keep inflation < 2% for some time

• Fed to lift off: Likely 2015, but slower and lower, with pause around 1% possible

• A marked rise in global bond yields unlikely

• Divergent monetary policies: ECB and BoJ may not raise rates this decade

• A marked rise in global bond yields unlikely; risk premiums remain compressed

• Credit and equity risk may be higher than duration risk

• Outlook for equity risk premium remains formative; central tendency of 6%–8% nominal 10-year returns

• In near term, equity returns biased lower

• Lowest projected expected returns since 2006 for balanced portfolios

Growth: Inflation and interest rates: Asset returns:


What is causing slower growth: Secular stagnation or structural deceleration?

Drivers and the economic and policy implications

Structural deceleration Secular stagnation

Primary drivers Demographic changes and productivity slowdown reducing trend growth

Deleveraging and insufficient policy responses restraining spending and growth

Economic implications Inflation expectations Stable Falling Output gap (“slack”) Small and closing Gap not closing Inflation and wage pressures

Building from a low base Deflation risk increasing

Policy implications Monetary policy Gradual tightening appropriate More quantitative easing (QE) Fiscal policy Infrastructure spending More fiscal stimulus

Note: For more details on drivers of each scenario and a full quantitative assessment of various markets, see Vanguard’s economic and investment outlook (Davis, Aliaga-Diaz, Patterson, and Ahluwalia, 2015). Source: The Vanguard Group, Inc.


Fed outlook: Three camps

Theoretical policy-rate paths

Note: Hypothetical illustration of path and end point of federal funds rate. Source: The Vanguard Group, Inc.

Cyclical view = later liftoff Structural slack = earlier liftoff

Cyclical view = higher long-term rate Structural slack = lower long-term rate

Secular stagnation slack = much later liftoff and a much lower long-term rate

~4.0% (Fed “dots”)

~2.5% (Vanguard)

~0%

Secular stagnation Cyclical rebound Structural deceleration


Canada’s growth outlook: Modest cyclical gains, +2% trend

Vanguard’s Canada dashboard of leading economic indicators

Vanguard’s 2015 Canada growth outlook Estimated distribution of growth outcomes

Sources: Vanguard calculations, based on data from Moody’s Analytics Data Buffet.

Note: Distribution of growth outcomes generated by bootstrapping the residuals from a regression based on a proprietary set of leading economic indicators and historical data, estimated from 1981 to 2014 and adjusting for the time-varying trend growth rate with HP filter. Sources: Vanguard calculations, based on data from U.S. Bureau of Economic Analysis (BEA) and Federal Reserve.

Housing, financial conditions, labour market Consumer and credit Commodities

21%

18%

20% 18%

12%

10%

0%

5%

10%

15%

20%

25%

Recession:Less than

0.5%

Stagnation:0.5 to 1.5%

Status Quo:1.5% to

2.5%

CyclicalRebound:2.5% to

3.5%

RobustGrowth:3.5% to

4.5%

Lift-off:More than

4.5%

Prob

abilit

y

Odds of a slowdown

39%

Trend growth 2.1%

Odds of an acceleration

40%

-6%

-4%

-2%

0%

2%

4%

6%

0%

25%

50%

75%

100%

1998 2001 2004 2007 2010 2013

Rea

l GD

P gr

owth

(yoy

)

% o

f lea

ding

indi

cato

rs


80

90

100

110

120

130

140

150

160

170

180

1990 1993 1996 1999 2002 2005 2008 2011 2014H

ouse

hold

Deb

t as

a %

of D

ispo

sabl

e In

com

e

CA HH Debt/Disp Income US HH Debt/Disp Income Adj

Canada government debt virtually a non-issue … Consumer debt is another story

Government debt to gross domestic product

Household debt to disposable income

Sources: Statistics Canada, BEA, and Federal Reserve. Data as of April 28, 2015. Note: Canada and United States disposable incomes are not directly comparable. Because the U.S. measure of disposable income includes some factors excluded from the Canadian measure—e.g. certain transfer payments—the U.S. statistics in the graph above are higher than the traditional U.S. measure of debt/disposable income by a factor of 1.3. Please see http://www.statcan.gc.ca/pub/13-605-x/2012005/article/11748-eng.htm for a description of the differences.

20

30

40

50

60

70

80

1990 1993 1996 1999 2002 2005 2008 2011 2014

CA Gov Debt/GDP US Gov Debt/GDP

http://www.statcan.gc.ca/pub/13-605-x/2012005/article/11748-eng.htm


Real estate—a major question mark Keep your home bias in check…

Canada weights relative to world

-6.6%

-5.7

16.5

+13.7

-6.8

-3.8

-10.9

6.3

-1.3

-1.4

72.9

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

Sum of absolute deviations Sources: Statistics Canada, BEA, and Federal Reserve. Data as of April 28, 2015.

Source: Vanguard calculations based on Factset data. Note: Data is as of December 31, 2013.


High debt burdens remain affordable

Debt-service ratio as percentage of disposable income

Sources: Vanguard calculations based on data from Moody’s Analytics Data Buffet and Federal Reserve. Data of April 28, 2015.

6

7

8

9

10

11

12

13

14

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Canada US


Decomposition of the largest oil-price drops varies

Supply and demand both pushing oil prices lower

Five largest declines, 1983–present

Notes: Components of oil-price drop are defined as: Supply = 7-month cumulative price change (CPC) in WTI spot oil prices minus 7-month CPC in spot copper prices; Demand = 7-month CPC in spot copper prices minus 7-month CPC in USD; Strength of U.S. dollar = 7-month CPC in USD major currencies index. Sources: Vanguard calculations, based on data from Thomson Reuters Datastream, U.S. Energy Information Administration (EIA), Standard & Poor’s, Federal Reserve, and Federal Reserve Bank of St. Louis. Monthly WTI spot values were used from Federal Reserve Bank of St. Louis, 1983–1985, and month-end WTI spot values from EIA, January 1986–January 2015.

-56%

-80%

-60%

-40%

-20%

0%

20%

Spring 1986 Spring 1991 Fall 2001 Fall 2008 Current(as of 1/2015)

Supply factors Demand factors Strength of U.S. Dollar

Perc

enta

ge c

hang

e


U.S. growth outlook: Modest cyclical thrust above low 2% trend: +2.5-3.0%

Vanguard’s U.S. dashboard of leading economic indicators

Vanguard’s 2015 U.S. growth outlook Estimated distribution of growth outcomes

Note: Distribution of growth outcomes generated by bootstrapping the residuals from a regression based on a proprietary set of leading economic indicators and historical data, estimated from 1960 to 2014 and adjusting for the time-varying trend growth rate. “Trend growth” represents “Projected future” estimated trend growth which is presented in the bar chart. Sources: Vanguard calculations, based on data from BEA and Federal Reserve.

16% 17%

22% 21%

14%

10%

0%

10%

20%

30%

Recession:Less than

0.5%

Stagnation:0.5 to 1.5%

Status Quo:1.5% to2.5%

CyclicalRebound:2.5% to

3.5%

RobustGrowth:3.5% to4.5%

Overheating:More than

4.5%

Prob

abilit

y

Odds of a slowdown

33%

Trend growth 2.1%


45%

Sources: Vanguard calculations, based on data from Moody’s Analytics Data Buffet. Data as of March 31, 2015.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0%

25%

50%

75%

100%

1998 2000 2002 2004 2006 2008 2010 2012 2014

Above-trend growth: Housing, labour market, consumer confidence Below trend, but positive momentum: Government, financial conditions, business confidence, manufacturing Below trend and negative momentum: Lending/credit Real GDP year of year (right-hand scale)

% o

f lea

ding

indi

cato

rs

Rea

l GD

P gr

owth

(YoY

)


Lower labour force participation is mainly a structural issue… United States is close to full employment

Decomposition of change in labour force participation (2007-2014)

Unemployment rates and adjustments for labour force participation changes

Notes: Figure displays results of a decomposition of factors contributing to the decline in U.S. labour force participation rate (source: Federal Reserve Bank of Atlanta, https://www.frbatlanta.org/chcs/LaborForceParticipation). * “Age-cohort effects” include those defined by Atlanta Fed as “prime age

in school or training, prime age taking care of family, schooling among young, prime age retired, and later retirement.”

** “Cyclical effects” include those defined as “prime age other reason and want a job.”

Sources: Vanguard calculations, based on data from Atlanta Fed.

0 1 2 3 4

Cyclical**

Age cohort effects*

Disability

Aging of population

Aggregate Drop

Decline in labour force participation rate (%)

Notes: Figure displays actual unemployment rate along with two adjusted measures. The first assumes the labour force participation rate stays constant at the December 2007 level of 66%. The second assumes that discouraged and marginally attached workers rejoin the labour force, pushing the hypothetical unemployment rate above the actual one. “NAIRU,” or the full employment level, refers to the non-accelerating inflation rate of unemployment, estimated by the U.S. Congressional Budget Office (CBO). Sources: Vanguard calculations, based on data from U.S. Bureau of Labor Statistics (BLS), U.S. Census Bureau, CBO, and Moody’s Analytics Data Buffet.

4

5

6

7

8

9

10

11

12

2007 2008 2009 2010 2011 2012 2013 2014 2015

Une

mpl

oym

ent r

ate

(%)

Actual UnemploymentAssuming Constant Labor Force ParticipationUnemployment Rate with Discouraged WorkersNAIRU


35% 35%

17%

12%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Stagnation/recession:<0.5%

Status Quo 0.5 to 1.5% Cyclical Rebound 1.5 to2.5%

Robust above-trendgrowth: >2.5%

Prob

abili

ty

Euro area growth outlook: Anemic growth with the risk of recession: +0.5-1.5%

Vanguard’s euro area dashboard of leading economic indicators

Vanguard’s 2015 euro area growth outlook Estimated distribution of growth outcomes

Sources: Vanguard calculations, based on data from Moody’s Analytics Data Buffet.

Notes: Distribution of growth outcomes generated by bootstrapping the residuals from a regression based on a proprietary set of leading economic indicators and historical data, estimated from 1960 to 2014 and adjusting for the time-varying trend growth rate. "Trend growth" represents "Projected future" estimated trend growth presented in the bar chart. Sources: Vanguard calculations, based on data from Eurostat, Destatis (Federal Statistical Office of Germany), French National Institute of Statistics and Economic Studies (INSEE), Italian National Institute of Statistics (ISTAT), Instituto Nacional de Estatistica (INE, Spanish Statistical Office), Statistics Netherlands (CBS), and Thomson Reuters Datastream.

Manufacturing, financial conditions, confidence, labour market Housing, government, global trade Lending/credit

-6%

-4%

-2%

0%

2%

4%

6%

0%

25%

50%

75%

100%

1998 2001 2004 2007 2010 2013

Rea

l GD

P gr

owth

(yoy

)

% o

f lea

ding

indi

cato

rs

Odds of a slowdown

35%


29%

Trend growth 1.1%


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2008 2009 2010 2011 2012 2013 2014 2015

Euro

are

a co

re H

ICP

YoY%

ECB inflation target (2%)

Inflation expectations

1.2%

Europe: Inflationary expectations are below target, and euro area growth is worse than Japan’s in the 1990s

Euro area core HICP Aggregate euro area real GDP relative to Japan

Sources: Vanguard calculations, based on data from Moody’s Analytics Data Buffet, Eurostat, National Bank of Belgium (NBB)–Belgostat, French National Institute of Statistics and Economic Studies (INSEE), Deutsche Bundesbank, Hellenic Statistical Authority (ELSTAT), Central Statistics Office (CSO, Ireland)–National Accounts Quarterly, Italian National Institute of Statistics (ISTAT), Statistics Netherlands, Instituto Nacional de Estatística (INE), and Cabinet Office-Japan.

Note: HICP = Harmonized Index of Consumer Prices. Sources: Vanguard calculations, based on data from Bloomberg, Thomson Reuters Datastream, ECB Survey of Professional Forecasters, Deutsche Bundesbank, and International Monetary Fund (IMF).

1.4%

Euro area (ECB) Japan (IMF)

88

90

92

94

96

98

100

102

104

2006 2007 2008 2009 2010 2011 2012 2013 2014R

eal G

DP,

Q1

2008

= 1

00

Eurozone Japan (1995-2004)100-line


0%

2%

4%

6%

8%

10%

12%

$5,000 $10,000 $15,000 $20,000 $25,000 $30,000

Annu

al re

al G

DP

grow

th

GDP per capita (USD)

China: Moving to high-income status means slower growth

Historical real GDP growth versus GDP per capita for various Asian economies

China 2002-2003

China 2009-2010

China 2014

China 2019

Notes: Chart illustrates real GDP growth rates against GDP per capita for China (for the years shown) and for Hong Kong, Japan, Taiwan, South Korea and Singapore (represented by the blue “bars and whiskers”) for 1951–November 2014. For each level of GDP per capita, we calculated distribution of real GDP growth rates across the five Asian economies. China 2014 and 2019 forecasts represent data from IMF World Economic Outlook (WEO), October 2014. Sources: Vanguard calculations, based on data from the Penn World Tables 8.0. (period 1951 – 2011) and IMF – WEO, October 2014.

Percentile key:

95th

25th

75th

5th

Median


0

5

10

15

20

Disposableincomegrowth

(take-homepay)

Nominal GDPgrowth

Moneymultiplier("moneycreationfactor")

Home pricegrowth

Bank creditgrowth

Headline CPIinflation

Core CPIinflation

1974-1975 1979-1981 Today

High-inflation concerns: Why a repeat of 1974 or 1980 is unlikely

Sources: The Vanguard Group, Inc.’s Investment Strategy Group calculations, based on data from BLS and Federal Reserve. Notes: Observations for the 1970s and 1980s reflect the 2-year average prior to the high-inflation period. Today’s values reflect the latest available 2-year growth. Data as of March 31, 2015.


Projected Consumer Price Index (CPI) inflation rate, current and 2013 10-year outlooks: Little change

VCMM–simulated distribution of 10-year annualized inflation, as of September 2013 and September 2014

0%

5%

10%

15%

20%

25%

30%

35%

Less than 0% 0-1% rate 1-2% rate 2-3% rate 3-4% rate Greater than 4%

Pro

babi

lity

10-year annualized inflation

Current 10 year outlook Outlook as of Sep 2013

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model™ (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM, derived from 10,000 simulations for Canadian Inflation. Simulations as of September 30, 2014. Results from the model may vary with each use and over time. For more information, please see the Important information slide. Source: Vanguard, Vanguard calculations, based on data from Moody’s Analytics Data Buffet.

Average inflation 1950–2014 3.7%

2000–2014 2.0%


0%

5%

10%

15%

20%

25%

30%

Less than1%

1 to 1.5% 1.5 to 2% 2 to 2.5% 2.5 to 3% 3 to 3.5% 3.5 to 4% 4 to 4.5% More than4.5%

Pro

babi

lity

10-year annualized return

Current 10-year outlook

Projected global fixed income 10-year return outlook

VCMM-simulated distribution of 10-year annualized return of the global fixed income market, as of September 2013 and September 2014

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM, derived from 10,000 simulations for global equity returns and fixed income returns. Simulations as of September 30, 2014 in CAD. Results from the model may vary with each use and over time. For more information, please see the Important information slide. Note: Figure displays projected range of returns for a portfolio of 40% Canada bonds and 60% ex-Canada bonds, rebalanced quarterly. Source: The Vanguard Group, Inc.

Historical global returns

1971–2014 8.8%

2000–2014 5.7%

Downward shift in distribution in 2015


Bond market 10-year return outlook: Setting reasonable expectations

10-year annualized returns

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class in CAD. Simulations are as of September 30, 2014. Results from the model may vary with each use and over time. Notes: Forecast corresponds to distribution of 10,000 VCMM simulations for 10-year annualized nominal returns as of September 2014 in CAD for asset classes highlighted here. Source: The Vanguard Group, Inc.

95th 5th 25th -75th percentile

Percentile key


-1%

0%

1%

2%

3%

4%

10 year Treasuryyield return less

cash return

0%

2%

4%

6%

8%

10%

12%

14%

US Treasury Yieldto Worst

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Credit BondSpread overTreasuries

Valuations remain compressed for both equity and fixed income

Equity valuations Fixed income valuations

Sources: Vanguard calculations, based on data from Barclays, Robert Shiller and Ken French. Notes: Equity valuation – nominal price over trailing 12-month nominal earnings from the Shiller data (1925 to present), U.S. Treasury valuation – yield to worst of the Barclays U.S. Treasury Index (1973 to present), Value vs. growth – Fama factors (annual data from 1926-2014), Credit premium – spliced option-adjusted spread (OAS) calculated by the difference in yield to worst between Barclays U.S. Intermediate Credit and Barclays U.S. Intermediate Treasury from 1978 to May of 1989 and then OAS of Barclays U.S. Credit Index.

0%

2%

4%

6%

8%

10%

12%

14%

Equity Valuation (12-month E/P)

0

1

2

3

4

5

6

Value v. Growth

Current

Ret

urn

Yiel

d

Yiel

d

Yiel

d

Yiel

d

Equity valuations


Bonds can provide ballast in an equity bear market

Median return of various asset classes during the worst decile of monthly equity returns, 1988–2014

-10%

-8%

-6%

-4%

-2%

0%

2%

U.S. stocks Emergingmarketstocks

REITs Dividendstocks

Commodities High-yieldbonds

Emergingmarketbonds

Hedge funds Corporatebonds

Treasurybonds

Int'l bonds(unhedged)

Int'l bonds(hedged)

Med

ian

retu

rn

Notes: U.S. stocks represented by Dow Jones Wilshire 5000 Index (1988 through April 22, 2005) and MSCI US Broad Market Index thereafter. U.S. bonds represented by Barclays U.S. Aggregate Bond Index. International bonds represented by Citigroup World Government Bond Ex-U.S. Index (1988 to January 1989) and Barclays Global Aggregate ex-USD Index thereafter. Emerging-market stocks represented by FTSE Emerging Index and emerging-market bonds by Barclays Emerging Markets Tradable USD Sovereign Bond Index. REITs represented by FTSE NAREIT Equity REIT Index, dividend stocks by Dow Jones U.S. Select Dividend Total Return Index, commodities by S&P GSCI Commodity Index, high-yield bonds by Barclays U.S. Corporate High Yield Index, hedge funds by median hedge fund-of-funds return as identified by Morningstar, Inc., corporate bonds by Barclays U.S. Corporate Investment Grade Index, and Treasury bonds by Barclays U.S. Treasury Index. Sources: Vanguard calculations, based on data from S&P, Citigroup, Barclays, Dow Jones, MSCI, CRSP and FTSE.


Hedging currency in fixed income: Why all the negativity?

The expected hedge return is the difference between the forward curves

At the time of the hedge, investors are indifferent between domestic and international bonds hedged back to their currency

Notes: U.S. spot and German yield curve data as of April 1, 2015. Sources: Vanguard calculations, based on data from the Federal Reserve and Bundesbank.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

12 24 36 48 60 72 84 96 108 120

Yiel

d (%

)

Months forward

US 1 Month Forward

DEU 1 Month Forward

This difference is the expected return from hedging: positive for USD, negative for EUR

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

12 24 36 48 60 72 84 96 108 120

Yiel

d (%

)

Maturity US Spot

DEU Spot

DEU Spot + CuAvg Hedge Return

A USD investor could achieve a similar yield to Treasuries by hedging bunds. The hedged yield would be identical to the U.S. spot yield under perfect foresight.


What predicts stock market returns?

Association of future real stock returns with various initial conditions: 1926–2012

Notes: The bar display the r-squared statistic of a regression model of forward real stock returns on each variable. Estimated using data available March 2012. Sources: The Vanguard Group, Inc.’s Investment Strategy Group analysis, based on data from S&P, Dow Jones, MSCI, Robert Shiller, BEA, National Weather Service, and Federal Reserve. Past performance is not a guarantee of future results.

43% 39%

23% 18% 18% 16%

6% 6% 0% 0%

0%

20%

40%

60%

80%

100%

PE10(ShillerCAPE)

PE1 Debt / GDP "BuildingBlocks"

DividendYield

Fed Model Rainfall TrailingReturns

ProfitMargins

ConsensusGDP

Per

cent

age

of v

aria

nce

expl

aine

d

10year Forward Real Returns 1year Forward Real Returns

R² ~ 100%: Very strong predictability

R² ~ 0%: Very weak predictability

Unexplained portion


VCMM-simulated distribution of 10-year annualized return of the global equity market, estimated as of September 2013 and September 2014

0%

5%

10%

15%

20%

25%

Less than 0% 0 to 3% 3 to 6% 6 to 9% 9 to 12% 12 to 15% 15 to 18% More than 18%

Prob

abili

ty

10-year annualized return

Current 10-year outlook Outlook as of Sep 2013

Downward shift in distribution in 2015

Projected global equity 10-year return outlook

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model™ (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM, derived from 10,000 simulations for global equity returns and fixed income returns. Simulations as of September 30, 2014 in CAD. Results from the model may vary with each use and over time. For more information, please see the Important information slide. Notes: Figure displays the projected range of returns for a 50% Canada, 50% ex-Canada equity portfolio, rebalanced quarterly. Source: The Vanguard Group, Inc.

Historical global returns

1971–2014 9.0%

2000–2014 3.4%


Setting reasonable expectations, being aware of widely dispersed potential returns

10-year annualized returns

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class in CAD. Simulations are as of September 30, 2014. Results from the model may vary with each use and over time. For more information, please see the Important information slide. Notes: Forecast corresponds to distribution of 10,000 VCMM simulations for 10-year annualized nominal returns as of September 2014 in CAD for asset classes highlighted here. Source: The Vanguard Group, Inc.

95th 5th 25th -75th percentile

Percentile key


Correlation of U.S. stock returns with changes in inflation and real rates†

Can stocks rise with rising rates? It depends on the source

Source: The Vanguard Group, Inc.’s Investment Strategy Group. Data as of December 2012. * Inflation is the change in Consumer Price Index. CPI data from January 1931 to present derived from Robert J. Shiller’s homepage

http://www.econ.yale.edu/~shiller/data.htm accessed: June 4, 2013. ** Real rate is the difference between cash and inflation. Cash is defined as U.S. cash reserve annual returns using Ibbotson U.S. 30-Day Treasury Bill Index from

January 1931 to December 1977 and the Citigroup 3-month Treasury Bill Index thereafter. † U.S. equities is defined as Standard & Poor’s 90 from January 1931 to February 1957; the Standard & Poor’s 500 Index from March 1957 to December 1974; the

Wilshire 5000 Index from January 1975 to April 2005; and the MSCI US Broad Market Index thereafter. Note: Change in inflation (and real rate) is defined as the difference between two non-overlapping 5-year periods in a 10-year timeframe. The difference is known as “actual” minus “expected.” Beginning in 1931, the annualized geometric return for the first 5-year period beginning December 1931 and ending December 1935 is defined as “expected.“ The subsequent 5-year period beginning January 1936 and ending December 1940 is defined as “actual.” Plotted on the y-axis is the geometric annualized returns of U.S. equities of the “actual” period, first of which is January 1936 to December 1940. Plotted are the results for 73 periods ending December 2012.

-10%

0%

10%

20%

30%

-6% -4% -2% 0% 2% 4%

R2 = 0.23

Change in inflation*

-5% -3% -1% 1% 3% 5% 7%

R2 = 0.25

Change in real rate**

http://www.econ.yale.edu/~shiller/data.htm


Projected 10-year nominal return outlook for balanced portfolios

VCMM-simulated distribution of 10-year annualized nominal returns of balanced global equity and global fixed income portfolios, estimated as of September 2014

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of September 30, 2014. Results from the model may vary with each use and over time. For more information, please see the Important information slide. Note: Forecast displays 5th/25th/75th/95th percentile ranges of 10,000 VCMM simulations for projected returns for balanced portfolios in CAD. The equity portfolio is 50% Canada equity and 50% global ex-Canada equity. The bond portfolio is 40% Canada bonds and 60% global ex-Canada bonds. Source: The Vanguard Group, Inc.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

20%/80% 60%/40% 80%/20%Portfolio stock / bond allocation

History 1971-2014 History 2000-2014

Key

5th percentile

95th percentiles

25th -75th percentile


The benefits of long-term perspective, balance and diversification

A balanced, diversified investor has fared relatively well

Notes: Stocks are represented by MSCI Canada Total Return Index, and bonds by Barclays Canadian Issues 300MM Index. Sources: Data provided by Barclays Live and Thomson Reuters Datastream, as of April 1, 2015.

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013 2014

Bala

nced

por

tfolio

val

ue

(inde

xed

to 1

00 a

s of

mar

ket p

eak)

50% Stock/ 50% Bond 100% Stock 30% Stock / 70% Bond

–17

–38

-7%

+62% +77

+118 Peak-to-trough return

Trough-to-peak return


Important information

Commissions, management fees and expenses all may be associated with the Vanguard ETFs™. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; read it before investing. Copies of the prospectus are available at www.vanguardcanada.ca. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard ETFs are managed by Vanguard Investments Canada Inc., an indirect wholly-owned subsidiary of The Vanguard Group, Inc. Date of Publication: June 9, 2015.

In this presentation, references to "Vanguard" are provided for convenience only and may refer to, where applicable only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

The opinions expressed in this presentation are those of the individual representative and do not necessarily reflect the opinions of Vanguard Investments Canada Inc. No implied or express recommendation, offer, or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy is made in this material. This presentation is not research, investment and/or tax advice and it is not tailored to the needs or circumstances of any individual investor.

Certain statements in this presentation may be considered “forward-looking information” which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Risks include, but are not limited to, local and global economic and political factors, interest and foreign exchange rates, financial market conditions, competition, legal or regulatory changes, and catastrophic events. These views are as of the presentation date, may change materially as conditions change, are subject to change without notice, and may not necessarily be updated or supplemented whether as a result of new information, changing circumstances, future events or otherwise. The economic statistics and projections presented in this material are subject to revision by the agencies that issue them.

Information, case studies, examples, figures and graphs are designed for illustrative purposes only and are subject to change without notice. The case studies and examples do not depict actual performance: the results are either calculated with the benefit of hindsight or are based on hypothetical simulated investment outcomes. The returns reflect the reinvestment of distributions and dividends, but do not reflect fees, transaction costs or other expenses, which would have reduced returns. Vanguard Investments Canada Inc. makes no representation regarding the advisability of investing in third-party products that utilize the indices mentioned herein. While this information has been compiled from sources believed to be reliable, Vanguard Investments Canada Inc. does not guarantee the accuracy, completeness, timeliness or reliability of these slides or any results from their use.


Important information (continued)

Notes on risk: All investments, including those that seek to track indexes, are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While Vanguard ETFs are designed to be as diversified as the original indexes they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model™ regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

No part of this presentation may be reproduced, distributed, disseminated or referred to, in whole or in part, in any form, including to any investor, without prior written and express permission by Vanguard Investments Canada Inc.

By participating in this presentation or by accepting any copy of the slides presented, you agree to be bound by these terms and conditions.

CFA® is a registered trademark owned by the CFA Institute.

© 2015 Vanguard Investments Canada Inc. All rights reserved.

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