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Yellen's a Shrewd Mutual Fund Investor

NEW YORK ( TheStreet) -- Janet Yellen, who was nominated to head the Federal Reserve, appears to be a shrewd mutual-fund investor. According to government disclosure documents filed in 2011, Yellen has up to $10.5 million in low-cost funds from Vanguard and Fidelity.

The document doesn't provide the exact amount in each fund. Instead, the disclosure lists a range. The portfolio has $250,001 to $500,000 in Vanguard Extended Market Index (VEXAX), a low-cost index fund that tracks mid-cap and small stocks. That choice should not be surprising. Yellen was a long-time professor of economics at Harvard and University of California at Berkeley, and many of her colleagues have argued for the use of index funds. But Yellen also holds some solid actively managed funds, including Fidelity Diversified International Fund (FDIVX) and Fidelity Investment Grade Bond (FBNDX).

Yellen seems to be keenly aware of tax considerations. For her taxable account, she put up to $5 million in Vanguard Tax-Managed Growth & Income (VTGLX). The fund aims to limit taxes while roughly tracking the S&P 500. The portfolio manager uses a range of techniques to avoid taxes. In one approach, he sells losing stocks to book losses that can be used to offset gains. Because of the tax maneuvers, the fund runs the risk of lagging the benchmark. But the goal is to outperform conventional S&P 500 funds on an after-tax basis.

Despite doing some extra trading, the tax-managed fund did a beautiful job of tracking the index. During the past 10 years, the fund returned 6.96% annually, compared with 7% for the S&P 500. Yellen would have little reason to complain about that showing. But the tax-managed fund trailed the plain-vanilla index fund Vanguard 500 Index (VFIAX), which returned 6.99%. After taxes, the two funds finished in a dead heat.

Yellen might consider switching to the standard index fund, which did better than investors should have expected. Under normal circumstances, an index fund should lag its benchmark by the expense ratio, which is subtracted from returns. Since the index fund charges 0.05%, you would expect it to trail by that amount. In fact, the fund lagged by 0.01%. Smart trading by the Vanguard portfolio managers must have provided an edge.

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