Pros and Cons of not using this Vanguard Fund

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investrc
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Joined: Wed Jul 18, 2018 12:37 pm

Pros and Cons of not using this Vanguard Fund

Post by investrc » Thu Aug 09, 2018 10:07 am

In my 457 account I have access to two very similar Large Cap Blend Funds.

DCP Equity Fund - .11% ER
https://www.retirement.prudential.com/R ... ADCPEQ.pdf

VINIX - Vanguard Institutional Index Fund (Institutional Shares) - .12% ER
https://www.retirement.prudential.com/R ... 49_5VI.pdf

I've been investing 20% of my portfolio in each (40% total). Since my plan basically charges .085% on top the ER for Vanguard, costing more than the DCP... should I just simplify and go with 40% all in DCP?

Silk McCue
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Re: Pros and Cons of not using this Vanguard Fund

Post by Silk McCue » Thu Aug 09, 2018 10:59 am

By reviewing the links you provided I found that the DCP fund is an actively managed fund that overweights funds and underweights others (you can compare the top holdings of each yourself) as compared to the VG S&P fund which strictly owns the benchmark index. They also tell you that they can invest up to 25% in short-term fixed income securities (sounds like a bit of market timing to me). The performance between the two funds is very similar over all time periods. However it lags slightly at 1,3,5 years and has an edge at 10 years. Adjusting for the extra fee on the VG fund they would come closer to that fund.

As a Boglehead I want to own either the S&P or Total US for my US equity holding. Therefore, given the choice I would go with the Vanguard fund. Were they not available I wouldn't wring my hands over having DCP as my only option but I would lobby for a true S&P or Total US fund be added.

DCP Equity Fund
The Deferred Compensation - Equity Fund seeks long-term growth of capital consistent with the ownership of equity securities.
Investment income is a secondary investment objective.
The Fund will invest primarily in a broad range of equity securities in order to achieve its objective of long-term growth of capital.
The Fund's investments may include common stocks, preferred stocks, and convertible securities. While the Fund will primarily
invest in companies domiciled in the United States, it may invest in foreign securities which are traded on U.S stock exchanges.
The Fund may also invest up to 25 percent in short-term fixed income securities. In choosing individual securities, the Fund invests
in a combination of growth and value stocks and seeks to provide a diversified portfolio.
There is no assurance the objectives will be met.
VINIX - Vanguard Institutional Index Fund (Institutional Shares)
DESCRIPTION/OBJECTIVE
The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitalization
stocks. The fund employs an indexing investment approach designed to track the performance of the Standard & Poor's 500 Index,
a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. It
attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index,
holding each stock in approximately the same proportion as its weighting in the index.
There is no assurance the objectives will be met.
Cheers

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jhfenton
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Location: Ohio

Re: Pros and Cons of not using this Vanguard Fund

Post by jhfenton » Thu Aug 09, 2018 11:16 am

investrc wrote:
Thu Aug 09, 2018 10:07 am
In my 457 account I have access to two very similar Large Cap Blend Funds.

DCP Equity Fund - .11% ER
https://www.retirement.prudential.com/R ... ADCPEQ.pdf

VINIX - Vanguard Institutional Index Fund (Institutional Shares) - .12% ER
https://www.retirement.prudential.com/R ... 49_5VI.pdf

I've been investing 20% of my portfolio in each (40% total). Since my plan basically charges .085% on top the ER for Vanguard, costing more than the DCP... should I just simplify and go with 40% all in DCP?
The ER on VINIX is 0.035%, so it appears the 0.12% ER quoted already includes the 0.085% extra fee for Vanguard funds. At that point, it's probably a wash. I would probably simplify to one of them rather than keep two similar funds. I'd probably go with VINIX just to eliminate manager risk.

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iceport
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Re: Pros and Cons of not using this Vanguard Fund

Post by iceport » Thu Aug 09, 2018 12:11 pm

The benefit of using the Vanguard Institutional Index fund (an S&P 500 index fund) is the confidence that the fund is an efficiently managed fund that will faithfully track its index. You can also track the performance and net asset value of the Vanguard fund using its ticker symbol independent of the state plan fact sheets and statements. In contrast, the DCP Equity fund is managed by the the less-known New Jersey Division of Investment, and you must rely on them for all reporting and management skill. It looks to me like it's a de facto S&P 500 index fund, in spite of the legal cover the fund objective provides for management flexibility.

The only disadvantage of using the Vanguard fund is the small extra cost involved due to the extra fees imposed by Prudential. But that disadvantage is tiny. As jhfenton noted, the ER for VINIX is currently 0.035%. The NJ 457 plan fact sheet lists added Prudential fees of 0.065% + 0.016% = 0.081%. That produces a total ER = 0.116%. That's only 0.006% more than the NJ DCP Equity fund, or $60/year per $1 Million.

Given that the two funds are so similar, it makes no sense to own both. If it were me, I'd choose the Vanguard fund. Their management skills are a better-known entity, as is the portfolio of the fund. With that said, the differences are probably negligible; either one will serve its purpose. But you don't need both.
"Discipline matters more than allocation.” ─William Bernstein

Silk McCue
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Re: Pros and Cons of not using this Vanguard Fund

Post by Silk McCue » Thu Aug 09, 2018 12:27 pm

iceport wrote:
Thu Aug 09, 2018 12:11 pm
It looks to me like it's a de facto S&P 500 index fund, in spite of the legal cover the fund objective provides for management flexibility.
I agree with your advice provided but they are not a de facto S&P fund. Were you to compare the two fact sheets provided by the OP, which I did and posted about earlier, they are overweighting and underweight funds. The top holdings listed for each quickly bear that out.

Cheers

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iceport
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Re: Pros and Cons of not using this Vanguard Fund

Post by iceport » Thu Aug 09, 2018 12:46 pm

Silk McCue wrote:
Thu Aug 09, 2018 12:27 pm
iceport wrote:
Thu Aug 09, 2018 12:11 pm
It looks to me like it's a de facto S&P 500 index fund, in spite of the legal cover the fund objective provides for management flexibility.
I agree with your advice provided but they are not a de facto S&P fund. Were you to compare the two fact sheets provided by the OP, which I did and posted about earlier, they are overweighting and underweight funds. The top holdings listed for each quickly bear that out.

Cheers
You are correct about the different weightings of the top holdings and sectors. Then again, the reporting on the two fact sheets are a month apart, so it's unclear how much that might factor in. Also, I wonder how much the different weightings shown on the fund sheet snapshots in time are due just to differences in how the funds operate and trade. But as you noted, the performance of the two funds are similar — so similar that any differences probably just amount to noise.
"Discipline matters more than allocation.” ─William Bernstein

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