clifp
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Oct 27, 2006
- Messages
- 7,733
I am seldom truly surprised by financial stories, but this one about Vanguards intermediate bond index was a shock.
The article goes on to discuss how this happened. Then it explains that it isn't really that rare that index funds are actively managed, and benchmarks aren't all created equal. Well worth reading for those of us who own "index" funds.
My biggest question is if Bogle was still managing Vanguard, would he talk to the manager of VBIIX and give him a stern lecture for not really indexing, or would give the guy a bonus for outperforming his competitors?
On Aug. 11, Morningstar's Christine Benz noticed something quite peculiar--the single best-performing intermediate-bond fund over the trailing month, out of 1,238 funds in the category, wasVanguard's Intermediate-Term Bond Index (VBIIX).
This wasn't indexing according to The House That Jack Built. The theory behind indexing is that low expenses coupled with an average portfolio gradually leads to above-average results. Each month, the index fund tends to be only very slightly above the norm, just a few basis points. But month after month that modest advantage becomes compounded, so that the index funds over time climb the rankings ladder.
But landing in top thousandth? After one month? What in the name of Bogle had happened? And what can we learn from this oddity?
What happened is unambiguous, and obvious upon reflection: The index fund invests quite differently than do the other funds in the category. Specifically, Vanguard Intermediate-Term Bond Index has one of the longest durations of any fund in the category (34th on the list), and one of the highest allocations to Treasuries (15th). With bond prices rallying sharply amid a flight to quality, in a flashback to 2008, the fund rode the bull. It gained 4.6% for the one-month period through mid-August, more than triple the category's average, and a full 50 basis points ahead of any nonindex fund. (In what likely was the worst stretch of relative performance in Bill Gross' long career, the Vanguard fund beat titanPIMCO Total Return (PTTAX) by 400 basis points during that time period.)
The article goes on to discuss how this happened. Then it explains that it isn't really that rare that index funds are actively managed, and benchmarks aren't all created equal. Well worth reading for those of us who own "index" funds.
My biggest question is if Bogle was still managing Vanguard, would he talk to the manager of VBIIX and give him a stern lecture for not really indexing, or would give the guy a bonus for outperforming his competitors?