Interesting Vanguard Article on Actively Managed Funds

[ejman]

I was surprised to see an article @ the Vanguard website mentioning the advantages and out performance of their actively managed funds:

"Between 1985 and 2014, Vanguard active funds, on an asset-weighted basis, have delivered about 0.45% in outperformance, net of fees.1 That may seem insignificant, but a small return advantage compounded over 30 years, can amount to a meaningfully higher-ending portfolio value. In this instance, an initial $10,000 investment invested across Vanguard's active funds, on an asset-weighted basis, would have grown to more than $287,000 at the end of 2014. That's more than 60% above their stated benchmark return of about $175,500."


https://personal.vanguard.com/us/insights/article/market-long-term-062016

 

[easysurfer]

My view is this is similar to Ford, known for selling big trucks also promoting an economical gas sipping car.

For Vanguard, the bread and butter is probably the index customers, yet at the same time, they do carry active funds too.

 

[ejman]

My view is this is similar to Ford, known for selling big trucks also promoting an economical gas sipping car.

For Vanguard, the bread and butter is probably the index customers, yet at the same time, they do carry active funds too.

As I understand it, Vanguard generally recommends a variety of index funds when offering their investment advice ( for their Flagship customers, for example). If their actively managed funds do actually out perform on average, then Vanguard's own advice may not be in the best interest of it's customers no?

 

[Gotadimple]

A similar article in the March edition of Kiplinger's Personal Finance magazine. Recommending a combination of index funds, etfs, and managed mutual funds - depending on the category of investment (bonds, small cap, large cap, etc.).

- Rita

 

[pb4uski]

As I understand it, Vanguard generally recommends a variety of index funds when offering their investment advice ( for their Flagship customers, for example). If their actively managed funds do actually out perform on average, then Vanguard's own advice may not be in the best interest of it's customers no?

Actually, I don't think you are accurately characterizing Vanguard's advice.

From my Portfolio Watch report:

Low-cost, broadly diversified index funds—which keep pace with market returns—should make up the core of long-term portfolios. ...

ok Index funds are the core of your portfolio, providing the benefit of significant diversification at low cost. Including one or more carefully chosen, low-cost, actively managed funds can add the potential for above-market returns.

(emphasis added)

Learn more about manager risk
Manager Risk Analysis categorizes your investments by separating "actively managed" investments, such as individual stocks or mutual funds where managers select the fund's holdings, from "passively managed" investments like index funds.

It is difficult for anyone to predict, consistently and accurately, which individual securities or actively managed funds will outperform the market.

The core of an investor's long-term portfolio should be low-cost, broadly diversified stock and bond index funds, which track market returns and don't try to predict which securities will perform well.

Also, while certain Vanguard actively managed funds may outperform their indices, on the whole actively managed funds do not... so I don't see anything adverse to their customer's interests in their advice.

 

[ejman]

Actually, I don't think you are accurately characterizing Vanguard's advice.

From my Portfolio Watch report:

(emphasis added)



Also, while certain Vanguard actively managed funds may outperform their indices, on the whole actively managed funds do not... so I don't see anything adverse to their customer's interests in their advice.

I got the impression from the article that Vanguard's "universe" of actively managed funds outperforms as in "Vanguard active funds, on an asset-weighted basis, have delivered about 0.45% in outperformance, net of fees." I'm not exactly sure how asset-weighted basis alters the result or how it is computed but I don't see a reference in their paper to using just some Vanguard funds to the exclusion of others but maybe the term asset-weighted basis comes to play here.

 

[REWahoo]

Unclemick will be along shortly with a "Psst! - Wellesley"...

 

[ejman]

Unclemick will be along shortly with a "Psst! - Wellesley"...

Ha! As I recall, even Unclemick was eventually persuaded to switch to an all index Target Retirement fund...

 

[pb4uski]

The paper's conclusion:

We believe that successful active management is driven
by the combination of low cost, top talent, and patience.
It is intuitive that lower fees should make it easier to
outperform a benchmark, but low costs alone cannot
guarantee success. On average, most active managers
have lagged their benchmarks; those that have surpassed
them over long periods are rare. Herein lies an apparent
paradox: In order to achieve success, investment
companies must engage rare talent at a low cost.

Despite this seemingly difficult hurdle, Vanguard has
been able to deliver actively managed equity fund results.
Over long periods, the median Vanguard active equity
fund has outperformed its costless benchmark as well
as the median non-Vanguard active equity fund.

Whether they are successful or not, active funds
come with volatility that can affect investors in two
ways. First, they may underperform their benchmarks
or comparable index funds for long periods. Second,
even when a group of funds does well, individual funds
within it can still do poorly. Individual fund selection
will influence an investor’s results.

Because of this volatility, only those investors with the
patience to withstand what could be extensive periods
of underperformance should consider actively managed
funds. Timing managers is as counterproductive as timing
markets. Instead, investors must be able to obtain top
talent at low cost and have the discipline to stick with
it over the long term.

In the end, we find that the most crucial factor is low
cost. Indexing has, to many, become synonymous with
low cost. But the historical data actually show a more
nuanced reality—low cost can improve an investor’s
odds of success with both active and indexed funds.

https://personal.vanguard.com/pdf/ISGKEY.pdf

 

[Trooper]

Thanks pb4uski. I think the article should have pointed out the relative tax inefficiency of actively managed funds, to provide a more complete picture.

 

[easysurfer]

An article titled "Passivity is the New Activity"adding to the discussion.

In the long-running contest between actively managed mutual funds and passive index funds, a large majority of researchers and many investment professionals seem to have concluded that passively managed ETFs and index style mutual funds decisively beat active management. There is no question but that the vast majority of index-style funds have historically outperformed their actively-managed peers over virtually every relevant time period.

So what’s the overall moral of the story? Two points stand out.
First, since investors never know what markets have in store in the future, maintaining a portfolio that includes active and passive management often makes sense. Factor investing can serve a valuable role in place of either active or passive.


Second, the only way that active management has historically succeeded in beating passive is by capitalizing on market inefficiencies caused by turbulence. Investors who want to benefit from active management need to have the stomach to endure years-long stretches of underperformance from that asset class and stomach churning volatility in the broader markets when the asset class does perform. In the absence of that kind of discipline, a passive approach is the best bet.

Passivity Is The New Activity | Dealbreaker

As for me, I'm lazy and know my own limitations, so I go the passive route 100% .

 

[mickeyd]

The bottom line seems to be that if you insist on owning managed MFs, select them from the ones that VG offers.