A Vanguard history lesson about active funds
In May, Vanguard celebrated its 44th anniversary. I use the word “celebrate” loosely, as there was no lavish party, champagne, red and white balloons, or other celebratory accoutrements.
There was, however, a trivia question: Can you name the 11 original funds at the company’s inception in 1975?
Jeopardy champ James Holzhauer probably couldn’t answer this one, but I was determined to do so. It wasn’t as easy as I had imagined. I consulted a few books, checked several shareholder annual reports, and even called upon the assistant to the late Jack Bogle. We could verify 10, but the 11th eluded us until I came across a yellowed press release (“Fund Group and Wellington Management Company Reach Accord”).
The 11 funds:
W.L. Morgan™ Growth
Trustees’ Equity Fund
Fund for Federal Securities
The discerning eye will notice no index funds. Vanguard 500 Index Fund would be introduced a year later. That means the original 11 funds were all actively managed.
So, for those who think of us as the “big indexer in Valley Forge,” our roots are actually in active. Here are some “did you know” facts about Vanguard’s active funds.
An active legacy
Vanguard’s active roots date back to the founding of Wellington Fund in 1929. Wellington weathered the stock market crash of that year and the ensuing bear market by adhering to a long-term, disciplined, and diversified approach—an approach that would become the hallmark of subsequent Vanguard active offerings.
Today, Wellington is the industry’s oldest balanced fund, reaching its 90th year of operations on July 1. It is also one of the largest balanced funds, with $105 billion in assets,* which is a testament to its enduring strategy, low costs, and consistent performance.
Size and scale
Vanguard is one of the largest active fund companies in the world, managing $1.3 trillion in actively managed fund assets, which represents nearly one quarter of our $5.4 trillion in total assets under management.** This puts us in the position to engage leading investment firms from around the world to oversee Vanguard mandates. It also enables us to invest a considerable amount in the skilled professionals of our internal Quantitative Equity and Fixed Income Groups and in advanced technology to manage vast sums of money effectively and efficiently.
Rigorous manager search and oversight
Vanguard maintains a thoughtful, comprehensive process to identify, evaluate, and monitor our investment advisors—both external and internal. We seek talented advisors that have demonstrated capabilities, deep investment management teams, well-articulated strategies, consistent philosophies, and strong track records. To instill even greater confidence in our active capabilities, the process is continual and includes oversight by the company’s senior leadership and the funds’ boards.
Why invest in an actively managed fund? Simply put, to provide you the opportunity to earn higher returns than peer funds and corresponding market benchmarks.
Let’s look at Vanguard’s record. Over the last 10 years, 86% of Vanguard’s actively managed stock and balanced funds beat their peer-group averages, and 36% beat both peers and benchmarks.†
Identifying funds that will outperform is challenging without the proverbial crystal ball. As such, a mix of index and active strategies is prudent, with the following considerations:
Be patient. While active funds can outperform over longer periods, you must be able to tolerate the inevitable periods when the strategy underperforms.
Be realistic. Past performance is no guarantee of future performance. And any analysis of performance is highly dependent on the time period, meaning that—one year to the next—the total returns and relative outperformance numbers shown here could vary substantially.
Be cost-conscious. High costs represent a high hurdle for active funds. Mr. Bogle used to say, “Fish in a low-cost pond.” The average expense ratio for Vanguard actively managed equity funds is 67% lower than the industry average.††
Be tax-savvy. Active equity funds tend to distribute taxable dividends and capital gains, so they’re better held in tax-advantaged vehicles, such as your IRA or 401(k) plan.
Author’s note: In the interest of full disclosure, I have been invested for lengthy periods in a number of Vanguard’s actively managed stock and bond funds, primarily in my IRA and Vanguard retirement plan.
*As of June 30, 2019.
**Sources: Vanguard and Morningstar, Inc., as of March 31, 2019.
†Source: Vanguard, using monthly return data from Morningstar, Inc., covering the 10-year period ended June 30, 2019. Compares average fund performance across 28 Vanguard actively managed stock and balanced mutual funds (Investor Shares) against their Lipper peer-group averages and their respective stated benchmarks. Averages include funds that invest both in the U.S. and internationally, as well as funds that were merged or liquidated during the 10-year reporting period. Only mutual funds with a minimum 10-year history were included in the comparison. Results will vary for other time periods. All fund performance data are net of fees. The competitive performance data shown represent past performance, which is not a guarantee of future results. View fund performance
††Vanguard average active equity fund expense ratio: 0.27%. Industry average active equity fund expense ratio: 0.81%. All averages are asset-weighted. Industry average excludes Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2018.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.