Most people have heard about Vanguard, one of the largest investment companies in the world. It is mostly known for their low-cost index funds. However, you may not know that they also believe in active management which contradicts with what you often hear from John Bogle, a true legend in the world of investing, founder of The Vanguard Group, and the greatest advocate for indexing. This week, I would like to share with you some of the facts I found and what we can learn from it.
Fact #1：The number of active mutual funds Vanguard has is almost the same as their index funds.
Based on the list of mutual funds on Vanguard's website, 70 out of their 142 mutual funds are actively managed，and the other 72 are index funds.
Fact #2：About 1/3 of all Vanguard assets are actively managed.
“Vanguard believes in active management" is one page on their website. It provides all the data and their investment philosophy on the active side of their business. As of 12/31/2016, they have more than $1 trillion invested in their active funds globally including ten variable annuity portfolios which you could not find on their fund list mentioned above.
Fact #3: Mr. Bogle owns actively managed funds in his personal portfolio.
According to an article from Morningstar, Mr. Bogle had about 24% of his portfolio invested in actively managed funds. Some of them were legacy holdings he could not bear to sell, and some of them were the funds he chose proactively.
Are you surprised by any of the facts above? I was shocked when I first found out the information. I knew that Vanguard has some actively managed mutual funds, but I didn't realize how big their active management business really is until then.
So, what I have learned from these facts?
1. Low cost is the key.
The fundamental philosophy contributing to the success of both the indexing and the active management business at Vanguard is low cost. There are so many research and data, including the one I recently shared with you here, showing that mutual funds with lower costs have higher probabilities to beat their relevant benchmark. It doesn't matter whether it is an index fund or not. One of the main reasons why the expense ratios of Vanguard funds are so low is that the company doesn't have to share their profits with outside owners. If you are not familiar with this, you could learn more about Vanguard's ownership structure directly from their website here.
2. Even Vanguard may not add value as an active manager.
When I heard about the active management business at Vanguard, the first question came to my mind was that can Vanguard's active funds outperform their respective benchmarks? After some research online, unsurprisingly I found that many people have done this analysis before. The one I like the most is the one from Index Fund Advisors, an investment management firm which has over $3.8 billion of assets under management as of 12/31/2017. In the article, they did a complete analysis of all the active funds Vanguard had at that time from both the cost and performance perspective. They concluded that they could not find any significant statistical evidence showing that Vanguard has added value as an active manager. One thing worth mentioning here (it may seem confusing to some of you when reading the article) is that even though both DFA funds and Vanguard's index funds are low-cost passive investments, they are different. We prefer to call DFA funds as evidence-based investing instead of indexing.
In summary, even though I am not a big fan of active management and I believe there is a better passive investment approach than traditional indexing, I still highly respect Vanguard as a company, their low-cost philosophy, their ownership structure, and even their indexing approach. Vanguard has indeed helped many investors over the years. It doesn't matter which investment philosophy you believe in, indexing, active management, evidence-based investing, or even day-trading. The only thing matters to you should be achieving your financial goals. Find one approach that makes the most sense to you based on your goals and stick to it for the long run.
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