Case 1-2 Vanguard International Growth Fund The Vanguard Group is an investment firm with more than 50 different mutual funds in which the public may invest. Among these funds are 13 international funds that concentrate on investments in non-U.S. stocks and bonds. One of these is the International Growth Fund. The following information about this fund was provided in the fund's prospectus, dated December 27, 2012. VANGUARD INTERNATIONAL GROWTH FUND Excerpts from Prospectus December 27, 2012 Vanguard Fund Summary Investment Objective The Fund seeks to provide long-term capital appreciation Primary Investment Strategies The Fund invests predominantly in the stocks of companies located outside the United States and is expected to diversity its assets across developed and emerging markets in Europe, the Far East, and Latin America. In selecting stocks, the Fund's advisors evaluate foreign markets around the world and choose large., mid., and small-capitalization companies considered to have above-average growth potential. The Fund uses multiple investment advisors Market Exposure The Fund invests mainly in common stocks of non-US. companies that are considered to have above- average potential for growth. The asset-weighted median market capitalization of the Fund as of August 31, 2012, was $32 billion The fund is subject to investment styles which is the chance that returns from non-U.S. growth stocks and to the extent that the Fund is invested in them, small and mid-cap stocks, will trail returns from the overall domestic stock market, Historically small and mid-cap stocks have been more volatile in price than the large stocks that dominate the overall market and they often perform guite differently The Fund is subject to stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of US stocks have, at times, moved in opposite directions The Fund is subject to country regional risk and currency Country regional is the chance that world events such as political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions. Because the Fund may inwest a large portion of its assets in securities of companies located in any one country or region, including emerging markets the funds performance may be hurt Optionately by the poor performance of its investments in that area. Currency is is the chance that the value of a foreign investment, measured in US dollars, will decrease because of unfavorable changes in currency exchange rates Country regional and currency are especially high in emerging markets The Fund is subject to manager risk, which is the chance that poor security Selection or focus on Securities in a particular sector category, or group of Companies will cause the fund to underperform relevant benchmarks of other funds with a similar investment objective PLAIN TALK ABOUT International Investing U.S. investors who invest abroad will encounter risks not typically associated with U.S. companies, because foreign stock and bond markets coerate differently from the U.S. markets. For instance, foreign companies are not subject to the same accounting. auditing and financial reporting standards and practices as U.S. companies, and their stocks may not be as liquid as those of similar U.S.forms. In addition, foreign stock exchanges, brokers, and companies generally have less government supervision and regulation than the counterparts in the United States. These factors, among others, could negatively affect the returns U.S. investors receive from foreign investments. Source: Vanguard International Growth Fund Prospectus. pp. 1-13. The International Growth Fund's annual report for the year ended August 31, 2012, indicated that 97 percent of the fund's portfolio was invested in 186 non-U.S. stocks and 3 percent was in temporary cash investments. The allocation of fund net assets by region was as follows: Europe 55 percent, Pacific 17 percent, Emerg- ing Markets 23 percent, North America 4 percent, and Middle East 1 percent. The sectors and individual countries in which the fund was invested are presented in the following tables: 6.6 Sector Diversification (% of equity exposure) Consumer discretionary ............ 16.6% Consumer staples .............. 10.4 Energy... 19.6 Financials.. Health care ............... 7.5 Industrials ........... .. . 14,1 Information technology. Materials Telecommunication services. Utilities ................ 0.9 . . Market Diversification (% of equity exposure) Europe Pacific United Kingdom ... 20.0% Japan........... Switzerland ...... 7.8 Australia ........ 43 France ...... . 7.6 Hong Kong ...... 3.4 Germany.......... 5.6 Other.. 0.4 Sweden ......... Subtotal...... ... 17.0% Spain... Emerging Markets Denmark 1.6 8.1% 1.4 5.3 Italy South Korea...... 3.7 2.0 Subtotal......... 54.9 54.9% Turkey .......... 1,2 China... Brazil... 2.0 Norway... 1.3 India 1.4 Other Source: . p. 13 Other..... 33 23.0% Subtotal.. North America Canada.. . United States..... Subtotal....... Middle East Israel ... .. 2.3% 1.5 3.8% 1.3% Source: A l port, p. 14 Required: 1. Explain why an individual investor might want to invest in an international growth fund. 2. Describe the risks associated with making an investment in an international growth fund. Identify the risks that would be common to domestic and interna tional funds, and those risks that would be unique to an international fund. 3. Discuss how the fact that foreign companies are not subject to the same account ing, auditing, and financial reporting standards and practices as U.S. compa- nies poses a risk not typically encountered when investing in the stock of U.S. companies