Vanguard International Explorer Fund Annual Report October 31, 2020
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Annual Report | October 31, 2020 Vanguard International Explorer™ Fund See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports. Important information about access to shareholder reports Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report. If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com. You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard. Contents Your Fund’s Performance at a Glance. 1 Advisors’ Report. 2 About Your Fund’s Expenses. 8 Performance Summary. .10 Financial Statements. 12 Trustees Approve Advisory Arrangements. .35 Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus. Your Fund’s Performance at a Glance • For the 12 months ended October 31, 2020, Vanguard International Explorer Fund returned 0.62%. Its benchmark, the S&P EPAC SmallCap Index, returned –0.92%. • In August, Baillie Gifford Overseas Limited was added as an advisor to the fund, managing 11% of assets. The fund’s four advisors invest in smaller companies—mostly from developed European and Pacific markets—that they believe have strong long-term growth prospects. • The period was marked by the global spread of COVID-19 and efforts to contain it, including lockdowns, the shuttering of nonessential businesses, and travel restrictions. However, responses from policymakers, the start of trials for vaccines and treatments, and the easing of some pandemic-related restrictions eventually lifted investor sentiment. The U.S. stock market rebounded more strongly than emerging markets and much more than developed markets outside the United States. • Stocks from emerging markets and Europe boosted the fund’s relative performance. Results were hampered by underweight allocations to North America and the Pacific region. • Six of the fund’s 11 industry sectors boosted performance relative to the benchmark; real estate helped the most. Materials, consumer discretionary, and utilities were the largest relative detractors. Market Barometer Average Annual Total Returns Periods Ended October 31, 2020 One Year Three Years Five Years Stocks Russell 1000 Index (Large-caps) 10.87% 10.63% 11.79% Russell 2000 Index (Small-caps) -0.14 2.19 7.27 Russell 3000 Index (Broad U.S. market) 10.15 10.04 11.48 FTSE All-World ex US Index (International) -2.17 0.13 4.52 Bonds Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) 6.19% 5.06% 4.08% Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) 3.59 4.09 3.70 FTSE Three-Month U.S. Treasury Bill Index 0.86 1.62 1.15 CPI Consumer Price Index 1.18% 1.82% 1.83% 1 Advisors’ Report For the fiscal year ended October 31, EPAC SmallCap Index. Indeed, smaller- 2020, Vanguard International Explorer Fund company stocks outperformed their returned 0.62%. Your fund is managed by larger-cap peers, as the S&P Large-Midcap four independent advisors, a strategy that EPAC Index returned –5.2%. Small-cap enhances its diversification by providing health care was especially strong, but exposure to distinct yet complementary small-caps also benefited from lower investment approaches. It is not uncommon exposure to energy and financials, where for different advisors to have different sentiment was particularly impacted by views about individual securities or the the pandemic. broader investment environment. For the period, we had strong stock The advisors and the amount and selection in every region. The biggest percentage of fund assets each manages contribution came from Japan, where a are presented in the accompanying number of our holdings in the industrial table. The advisors have also prepared a (Daifuku, Nabtesco) and information discussion of the investment environment technology (GMO Internet, NEC Networks that existed during the year and of how & System Integration, Disco) sectors their portfolio positioning reflected that performed well. assessment. These comments were prepared on November 19, 2020. The contribution from the United Kingdom, where our holdings proved defensive in a poorly performing market, was not far Schroder Investment Management behind. This was most evident in industrials North America Inc. (Bunzl), real estate (thanks to the focus on residential and warehouse distribution), Portfolio Managers: and financials (IG Group, which benefited Matthew F. Dobbs, from market volatility). Consumer cyclicals Head of Global Small Companies remained a difficult area given pandemic- related lockdowns, although Pets at Home Luke Biermann, and Dunelm bucked the trend. Co-manager After a difficult couple of years, it is a Given the momentous events of the fiscal relief to report strong numbers from our year surrounding the emergence of the continental European segment. Within global COVID-19 pandemic, it is perhaps consumer cyclicals, Hello Fresh benefited surprising to report that international from increased dining at home. Other small-capitalization stocks largely held their notable performers included Trigano ground, registering a marginal decline and (recreational vehicles), Arjo (medical returning –0.9% as measured by the S&P 2 equipment), Recordati (pharmaceuticals), In the fourth quarter of 2019, declining and Logitech (computer and gaming recession fears and forecasts for improving peripherals). global growth helped bolster risk sentiment, while geopolitics and trade disputes Stock selection in Asia ex-Japan and continued to be major drivers of market emerging markets also contributed, with volatility. The U.S. canceled tariffs that notable strength in Techtronic Industries were scheduled to take effect in December, (cordless power tools), Li-Ning (Chinese in an effort to secure a phase one trade sportswear retailer), and Voltronic Power deal with China. Technology, a Taiwanese manufacturer of uninterrupted power supply equipment. International equities ended the first quarter of 2020 sharply lower as the In many ways, the last year has accelerated coronavirus spread rapidly, causing structural trends evident in prior years, unprecedented disruptions to financial such as the increased penetration of online markets and economies. Most govern- commerce, digital payments, and more ments took extraordinary measures to automation and technology in our lives. limit financial market stress and mitigate We believe that well-placed smaller the economic fallout. In the second companies can provide attractive exposure quarter, international equities surged, as to the dynamism of the global economy. markets were fueled by optimism about successful early stage trials for a potential COVID-19 vaccine, ongoing fiscal and Wellington Management monetary stimulus, and signs that global Company LLP economic activity was improving. In the third quarter, markets were bolstered Portfolio Manager: by the impact of the massive fiscal and Mary L. Pryshlak, CFA, monetary stimulus, further signs of a Senior Managing Director and Head of recovery in global economic growth, and Investment Research encouraging progress with vaccines. For the 12 months ended October 31, In our portion of the fund, stock selection 2020, international small-cap equities in the consumer discretionary, industrials, returned –0.9% as measured by the and materials sectors detracted most from S&P EPAC SmallCap Index, while global relative performance. This was partly offset equities rose more than 5.4%, as by positive selection in health care and measured by the MSCI All Country financials. Among regions, selection within World Index. Europe and Japan detracted the most from relative performance. 3 Among the top relative detractors were new coronavirus test would slash the wait Autogrill, Dufry, and Elior Group. Shares time for results. Shandong Weigao is a of Autogrill, an Italian food and beverage market leader in medical consumables operator with global exposure to airports and orthopedics in China. The company and motorways, declined on reduced benefited from an increase in the export travel demand because of COVID-19. of masks and other relevant products We like the long-term fundamentals of to combat the spread of