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Investing Specialists

How Have Vanguard's Best Bear-Market Funds Done?

Most have fallen hard, but still less than most of their peers.

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Late in the summer of 2007, after a sell-off in June and July gave us the first taste of what 2008 has had in store for us, I highlighted in an article on Morningstar.com what I thought were Vanguard's best bear-market funds. I'm not bragging. I made it clear in the article that I wasn't predicting a bear market, just trying to point investors who got a bad case of the jitters after last year's volatility toward some options that might be easier for them to hold over the long term. A secondary purpose was to single out offerings that might achieve some of the same goals of the new  Vanguard Market Neutral (VMNFX)--downside protection and decent absolute returns--without the short selling or extra expense.

Just how have those funds fared since the big bad bear came out to play this year? And how have they done relative to the new Vanguard Market Neutral? Well, the good news is that all of the five funds I mentioned have done better than their respective peers in the past year. The bad news is that four of the five have suffered losses that would stress the most optimistic investor's definition of downside protection. It's been that kind of a year. Even funds that have performed as designed are down double digits. Here's a look at the funds.

You Should See the Other Guy
 Vanguard LifeStrategy Income (VASIX) has lost more than 12% for the year ended in October, but that was less than about 90% of the conservative-allocation category. The fund of funds lost money despite keeping nearly three fourths of its assets in  Vanguard Short-Term Investment Grade (VFSTX) and  Vanguard Total Bond Market Index (VBMFX)--two diversified fixed-income funds with better-than-average credit quality and less interest-rate risk relative to their respective peers. There have been few places to hide this year, but the fund also has taken a hit from its position in  Vanguard Asset Allocation (VAAPX). Asset Allocation, a fund that can shift its helping of stocks, bonds, and cash depending on its projections for their future returns, has been mostly in stocks for most of this year, which has hurt.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.