Moving back to active: Will Vanguard beat American Funds by 0.24%?

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Sammy_M
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Moving back to active: Will Vanguard beat American Funds by 0.24%?

Post by Sammy_M » Tue Oct 24, 2017 9:25 am

I was successful in arguing for Vanguard funds to be added to our plan several years ago. Our plan currently offers both active and passive funds. However, the plan is now instituting a change where they will charge participants a 0.29% administrative fee, and then credit us the "rate of service fees" paid by mutual funds. It appears the better active funds, American Funds, pay 0.24% in 12b-1 fees. Vanguard pays nothing.

I am not confident the Vanguard funds will beat the equivalent American Funds by 0.24%. Below is historical 4-factor analysis using Portfolio Visualizer for the period Jan 2001 to Aug 2017, when VTSAX first became available. American Funds have generated alpha. They may not in the future, but 0.24% is a serious drag (literally and figuratively). I would shift our IRA investments to achieve the target small/value factor loads at the total portfolio level.

Please share any comments, for or against. Thanks.

Code: Select all

Name	                               Ticker	Alpha	Rm-Rf	SMB	HML	MOM	R2
[Domestic Large]							
Vanguard Total Stock Mkt Idx Adm	VTSAX	0.00%	1	0	0.01	0	99.90%
American Funds Growth Fund of Amer A	AGTHX	0.49%	0.99	0.05	-0.18	-0.02	95.40%
American Funds Invmt Co of Amer A	AIVSX	0.73%	0.88	-0.13	0.09	0.02	96.20%
American Funds Washington Mutual A	AWSHX	1.08%	0.86	-0.17	0.21	0.02	94.90%
							
[Foreign Developed Large]							
Vanguard Developed Markets Index	VTMGX	-0.73%	1	-0.25	0.01	0.01	98.50%
American Funds Europacific Growth A	AEPGX	1.64%	0.93	-0.15	-0.11	0.04	95.50%

financeidiot
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Re: Moving back to active: Will Vanguard beat American Funds by 0.24%?

Post by financeidiot » Tue Oct 24, 2017 9:46 am

I may be misinterpreting what you wrote, but isn't the total administrative expense equal for both funds?

If you're charged 0.29% administrative fees and credited for 12b-1 fees and other service fees, then wouldn't these be the total costs?

Vanguard = Expense ratio + 0.29% administrative service fees
American Funds = Expense ratio + 0.24% 12b-1 + 0.05% administrative service fees

So if administrative costs are equal or approximately equal for these funds, choose the ones that fit your philosophy or the one that's cheapest after accounting for all fees and costs.

lack_ey
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Re: Moving back to active: Will Vanguard beat American Funds by 0.24%?

Post by lack_ey » Tue Oct 24, 2017 10:28 am

Alpha getting increasingly scarce, relative future performance being relatively unpredictable from relative past performance, and the American Funds funds having lower market beta so they're effectively deleveraged put together mean that I'd lean on the side of the Vanguard funds in this type of account under these conditions, but it's not a strong preference.

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Sammy_M
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Re: Moving back to active: Will Vanguard beat American Funds by 0.24%?

Post by Sammy_M » Tue Oct 24, 2017 10:41 am

financeidiot wrote:
Tue Oct 24, 2017 9:46 am
I may be misinterpreting what you wrote, but isn't the total administrative expense equal for both funds?

If you're charged 0.29% administrative fees and credited for 12b-1 fees and other service fees, then wouldn't these be the total costs?

Vanguard = Expense ratio + 0.29% administrative service fees
American Funds = Expense ratio + 0.24% 12b-1 + 0.05% administrative service fees

So if administrative costs are equal or approximately equal for these funds, choose the ones that fit your philosophy or the one that's cheapest after accounting for all fees and costs.
Your interpretation is the same as mine, but the portfolio visualizer analysis is after expenses (ignoring loads, which do not apply in our retirement plan). I believe the odds are great that passive beats active after costs, but the likelihood drops significantly if you add 0.29% of cost to the passive instruments. Tax efficiency is also not an issue in a 401K.

financeidiot
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Re: Moving back to active: Will Vanguard beat American Funds by 0.24%?

Post by financeidiot » Tue Oct 24, 2017 3:03 pm

If you believe in the active funds available, go ahead. Unfortunate that there's a penalty for passive investing. Seems like the 401k provider is acting in their own best interest rather than the interests of plan participants.

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Sammy_M
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Re: Moving back to active: Will Vanguard beat American Funds by 0.24%?

Post by Sammy_M » Tue Oct 24, 2017 6:39 pm

financeidiot wrote:
Tue Oct 24, 2017 3:03 pm
Unfortunate that there's a penalty for passive investing. Seems like the 401k provider is acting in their own best interest rather than the interests of plan participants.
Their view is that I've been free-riding up to this point. Time to pay my fair share. :wink:

NYC_Guy
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Re: Moving back to active: Will Vanguard beat American Funds by 0.24%?

Post by NYC_Guy » Tue Oct 24, 2017 8:31 pm

I don’t think you’re crazy for doing this. But, as you mention, that active fund is likely to have a reduced beta. Consider whether you want to up your beta exposure elsewhere. Or alter your AA.

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