A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

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A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by lack_ey »

In this fund series profile I'll be highlighting seven actively managed mutual funds from Vanguard, all of the ones internally managed by the Vanguard Quantitative Equity Group [edit: solely managed, that is; they are responsible for a fraction of some other funds as well]. What are their quants up to, exactly? Are they closet indexers? Factor tilters? Are the costs reasonable? Stay tuned and find out.

The fund names were intentionally left out of the thread title as that would be a bit much. They are U.S. Value, Strategic Equity, Strategic Small-Cap Equity, Market Neutral, Global Minimum Volatility, Alternative Strategies, and Managed Payout. The fund names, tickers, minimum investments, expense ratios, and managers are listed below. The next post will discuss the first four funds, while the following post will cover the last three funds.

All of the funds are actively managed, with the team making changes to all of them over time based on their evolving view of the research and best practices. All are probably bad in taxable accounts. They take trading costs into account for execution but are relatively high turnover and don't have ETF share classes, so they do distribute capital gains.

Vanguard U.S. Value (VUVLX)
$3k min investment, ER = 0.26%
$1.5 billion AUM, 76% turnover
Inception June 29, 2000
Managers James P. Stetler, Binbin Guo, Anatoly Shtekhman
In 2000-2008, managed by GMO, 2007-2010 by AXA Rosenberg; Vanguard was partial manager since 2008 and only manager since late 2010.

Vanguard Strategic Equity (VSEQX)
$3k min investment, ER = 0.21%
$6.4 billion AUM, 74% turnover
Inception August 14, 1995
Managers Michael R. Roach, James P. Stetler, Binbin Guo
Managed since inception by Vanguard, including 1995-2006 by Gus Sauter (former Vanguard CIO).

Vanguard Strategic Small-Cap Equity (VSTCX)
$3k min investment, ER = 0.34%
$1.5 billion AUM, 89% turnover
Inception April 24, 2006
Managers James P. Stetler, Michael R. Roach, Binbin Guo
Managed since inception by Vanguard, starting with Stetler.

Vanguard Market Neutral (VMNFX, VMNIX)
$250k min, $5M min investment; ER = 0.25%, 0.15%*
$2.0 billion AUM, 68% turnover
Inception November 11, 1998
Managers Michael R. Roach, James P. Stetler, Binbin Guo
In 1999-2010, managed by AXA Rosenberg, originally not even being a Vanguard fund; Vanguard was partial manager since 2007 and only manager since late 2010.

Vanguard Global Minimum Volatility (VMVFX, VMNVX)
$3k min, $50k min investment; ER = 0.27%, 0.21%
$1.6 billion AUM, 57% turnover
Inception December 12, 2013
Managers Michael R. Roach, Binbin Guo, Anatoly Shtekhman
Managed since inception by Vanguard, starting with Roach.

Vanguard Alternative Strategies (VASFX)
unavailable to the public; ER = 0.40%**
$232 million AUM, 25% turnover
Inception August 11, 2015
Managers Michael R. Roach, Binbin Guo, Anatoly Shtekhman
Managed since inception by Vanguard, starting with Roach.

Vanguard Managed Payout (VPGDX)
$25k min investment; ER = 0.23%***
$1.7 billion AUM, 29% turnover
Inception May 2, 2008
Managers John Ameriks, Anatoly Shtekhman, Michael H. Buek
Managed since inception by Vanguard, starting with Buek.

* Vanguard quotes the operational expense ratio as 1.46% and 1.36%, but these figures include brokerage costs of covering borrowing costs and dividends on the short sales. The smaller figures represent Vanguard's actual management fee, making this by far the cheapest in the category. At some other brokerages the minimum to qualify may be lower for the investor shares, but it'll probably not be NTF so you'll pay a commission to trade.

** Vanguard Alternative Strategies is only available to Vanguard Institutional Advisory Services clients. The listed expense ratio here is Vanguard's actual management fee. They list 0.73% elsewhere, again including borrowing costs and dividends on short sales. This figure may be stale and I think the cost is a bit lower now.

*** Vanguard Managed Payout includes allocations to other Vanguard funds, including the two noted above. This figure is something of a guess pieced together from information in the report. The figure listed by Vanguard is 0.38% but this includes short-sale dividend and borrowing costs in those other funds. The management fee in the report for this fund is 0.02% on top of acquired fund fees.

===
edit [1/11/2017]: I missed a couple of institutional funds earlier that will close in Feb. 22, 2017. Apparently the majority of their assets were from one client and that client intends to redeem, so they'll shutter the funds. I'll add them now for completeness. These used to not be mutual funds but were converted, and they were never really marketed.

Vanguard Structured Large-Cap Equity (VSLIX)
$5M min investment; ER = 0.20%
$69 million AUM, 67% turnover
Inception May 15, 2006
Managers Michael R. Roach, James P. Stetler, Binbin Guo
Managed since inception by Vanguard.

Vanguard Structured Broad Market (VSBMX)
$5M min investment; ER = 0.20%
$187 million AUM, 78% turnover
Inception May 3, 2004
Managers James P. Stetler, Binbin Guo, Anatoly Shtekhman
Managed since inception by Vanguard.
Last edited by lack_ey on Wed Jan 11, 2017 1:05 pm, edited 2 times in total.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by lack_ey »

Vanguard U.S. Value, Strategic Equity, Strategic Small-Cap Equity, and Market Neutral all invest solely in U.S. stocks and share a common screening process for evaluating stocks. The first three are long-only equity funds, while the Market Neutral fund is long/short with long and short sides each 1x invested and offsetting, with an attempt to be beta neutral as well.

All stocks are ranked according to five characteristics:
  • High quality - healthy balance sheets, steady cash flow
  • Effective use of capital - sound investment policies favoring internal rather than external funding
  • Consistent earnings growth
  • Strong market sentiment - determined by analyst ratings, price momentum, etc.
  • Valuation - lower preferred
The first three correspond to and are related to the quality factor. Obviously the last corresponds to the value factor. And the market sentiment has some overlap with some momentum definitions. In other words, Vanguard is effectively running value/momentum/quality factor-plus funds, with some twists.

One of these twists is the fact that the funds are deliberately sector neutral, keeping sector weightings the same as the benchmarks. As a result, tracking error is lower, if nothing else. This approach, while not novel and shared by some others, runs counter to traditional factor investing formulations, and many other quant shops prefer to allow sector bets against a benchmark arising from the security selection or even see a benefit in picking factors or other signals across sectors explicitly. For example, in retrospect any kind of valuations/fundamentals screening on an individual or sector basis would have been underweight in tech around the peak of the bubble, probably a good thing (though missing out on gains in the run-up).

Of course, quants with their own takes and adjustments are everywhere, and time will reveal the efficacy of Vanguard's particular approach. It's just that most quants aren't charging Vanguard fee levels. In fact, U.S. Value, Strategic Equity, and Strategic Small-Cap Equity are fee competitive with multifactor index funds and smart beta funds that aren't market cap weighted, including fundamental indexing. Usually, non-market-cap weighted funds charge higher management fees.

All of these funds will evolve over time as Vanguard makes changes, hopefully for the better, based on continued research. Recently, Vanguard has shifted how they weight and interpret the five characteristics covered above, and they use different weightings for different sectors, believing some are more or less indicative based on the line of business. As such I'll look only five years back for the factor and performance analysis for each fund, hoping not to capture too much of the older strategies. This is particularly the case for some of these funds, which used to be subadvised by others up to about six years ago. Alpha and returns and generally not going to be statistically significant in any kind of five-year view, so try not to overinterpret the relative performance numbers, which are not very meaningful.

In the next section I'll cover individual funds and then provide links to Portfoliovisualizer for factor analysis and correlations where relevant, and Morningstar growth charts.

===

Vanguard U.S. Value (VUVLX)
$3k min investment, ER = 0.26%
$1.5 billion AUM, 76% turnover
Inception June 29, 2000
Managers James P. Stetler, Binbin Guo, Anatoly Shtekhman
In 2000-2008, managed by GMO, 2007-2010 by AXA Rosenberg; Vanguard was partial manager since 2008 and only manager since late 2010.

Vanguard U.S. Value uses the Russell 3000 as a benchmark and its investment universe, so while it's large cap value on average, it digs all the way down into small cap value. Morningstar says that each stock is overweighted or underweighted by no more than 50 basis points compared to the index. Now, if a stock only has a weighting of 0.1% in the benchmark, it can't be underweighted by more than 10 bp, as the fund is long only. The fund targets a tracking error of 2% to the benchmark, so tracking error should be especially low.

Its factor weightings relative to its index are very mild, seemingly, with only some momentum added. Performance the last five years has been good, beating the index and the S&P 500 despite very tame tracking error and extremely high R^2.

https://www.portfoliovisualizer.com/fac ... ssetType=1
https://www.portfoliovisualizer.com/ass ... ingDays=60
http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

Vanguard Strategic Equity (VSEQX)
$3k min investment, ER = 0.21%
$6.4 billion AUM, 74% turnover
Inception August 14, 1995
Managers Michael R. Roach, James P. Stetler, Binbin Guo
Managed since inception by Vanguard, including 1995-2006 by Gus Sauter (former Vanguard CIO).

Vanguard Strategic Equity is extremely cheap for a non-cap-weighted, mid/small cap fund at 0.18%. It uses the MSCI U.S. Small + Mid Cap 2200 Index as the investment universe, which excludes the largest 300 stocks from consideration. If you don't like seeing Apple, Microsoft, Exxon, J&J, etc. top the holdings lists of your factor or active funds, you won't find them here.

Morningstar says that each stock can be overweighted or underweighted by up to 80 bp compared to the benchmark, with a 4% tracking error targeted. As such it has a bit of a longer leash than U.S. Value but is still relatively constrained.

I don't know of a fund tracking the benchmark, but the S&P Completion Index (extended market; which excludes the S&P 500) shouldn't be that much different. The last five years, Strategic Equity has outperformed it and the S&P 500 by over 2.5% a year, with volatility close to but a little less than the extended market. However, the fund did considerably worse in previous years despite similar factor exposures. The ten-year performance lags the extended market, though it beat the S&P 500, though with higher volatility.

https://www.portfoliovisualizer.com/fac ... ssetType=1
https://www.portfoliovisualizer.com/ass ... ingDays=60
http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

Vanguard Strategic Small-Cap Equity (VSTCX)
$3k min investment, ER = 0.34%
$1.5 billion AUM, 89% turnover
Inception April 24, 2006
Managers James P. Stetler, Michael R. Roach, Binbin Guo
Managed since inception by Vanguard, starting with Stetler.

Vanguard Strategic Small-Cap Equity uses the MSCI U.S. Small Cap 1750 Index as its investment universe. It is presumably mananged similarly to Vanguard Strategic Equity, but I can't find information about its exact over/underweighting and tracking error. Like Strategic Equity, the performance the last five years has been good, but the performance the five years prior was not.

I'm not aware of a fund following the MSCI index, but Strategic Small-Cap Equity is similar in size to Schwab's small cap ETF following a Dow Jones index, with smaller market caps than Vanguard's standard index offering holds.

The performance the last five years has mostly tracked small cap value funds at leat cumulatively, though it seems to track momentum more so than value. Like the other funds, it is fairly well diversified and has a large R^2 about 0.98. The volatility was similar to Schwab's fund.

https://www.portfoliovisualizer.com/fac ... ssetType=1
https://www.portfoliovisualizer.com/ass ... ingDays=60
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Vanguard Market Neutral (VMNFX, VMNIX)
$250k min, $5M min investment; ER = 0.25%, 0.15%
$2.0 billion AUM, 68% turnover
Inception November 11, 1998
Managers Michael R. Roach, James P. Stetler, Binbin Guo
In 1999-2010, managed by AXA Rosenberg, originally not even being a Vanguard fund; Vanguard was partial manager since 2007 and only manager since late 2010.

Vanguard Market Neutral is a relatively conservatively run equity market neutral fund, running its stock selection in about the largest couple thousand US equities. Like others in its category, it is two portfolios in a single fund: a long portfolio that looks like your everyday equity fund consisting of stocks it hopes will do well, and a short portfolio of stocks it is selling short that it hopes will do relatively worse (that is, gain less or lose more than the long side). This construction originated in the hedge fund world but was one of the first traditional hedge fund construction/strategies to be offered in mutual fund format. Now there are dozens of competitors, though nobody offers it at fees anything close to Vanguard's.

As mentioned before, it is 1x invested long and 1x invested short, so exposures are offsetting, with an attempt to be beta neutral as well. Realized market beta and correlation with the market has been low. Many competitors leverage the long and short sides, but Vanguard does not. Some additionally scale the exposures with market volatility, whereas I believe Vanguard does not. This means that the fund will probably be more volatile when the markets are, though in theory not in a predictable direction (could be up when the market is down, or down too). Vanguard keeps position sizes of individual securities limited to about 50 bp long or short.

The fund is furthermore approximately equally matched in terms of sectors on the long and short sides, continuing with the tradition of not making sector bets. Again, many competitors believe in making sector bets in these types of funds, whereas Vanguard does not.

If you believe in the process Vanguard uses in these four funds but have considerable investments in taxable accounts, it may make sense to use Market Neutral instead of the others because its effective active share or bets against the benchmark are more concentrated per dollar invested. You can stuff it into tax-advantaged space while holding more tax-efficient investments elsewhere. That said, the benefit has not really materialized in practice so far.

While the minimum investment into the fund is a hefty $250k, with Vanguard effectively gating out smaller investors, you can find lower minimums at other brokerages. For example, I believe the minimum at Fidelity is $2.5k, though there's a $75 transaction fee on purchases.

A lot of the poor historical results from the fund come from AXA Rosenberg's management; the last five years, performance has happened to be relatively steady, kind of bondlike, with volatility a bit above bonds but definitely lower than stocks. With 1x down and up, you should expect volatility considerably under the stock market, and that's what we've gotten. In any case, market beta has been effectively zero as advertised, and it looks neither like stocks nor bonds (nor commodities).

https://www.portfoliovisualizer.com/fac ... ssetType=1
https://www.portfoliovisualizer.com/ass ... ingDays=60
http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

===
edit [1/11/2017]: I missed a couple of institutional funds earlier that will close in Feb. 22, 2017. Apparently the majority of their assets were from one client and that client intends to redeem, so they'll shutter the funds. I'll add them now for completeness. These used to not be mutual funds but were converted, and they were never really marketed.

Vanguard Structured Large-Cap Equity (VSLIX)
$5M min investment; ER = 0.20%
$69 million AUM, 67% turnover
Inception May 15, 2006
Managers Michael R. Roach, James P. Stetler, Binbin Guo
Managed since inception by Vanguard.

Vanguard Structured Broad Market (VSBMX)
$5M min investment; ER = 0.20%
$187 million AUM, 78% turnover
Inception May 3, 2004
Managers James P. Stetler, Binbin Guo, Anatoly Shtekhman
Managed since inception by Vanguard.

Both funds use the same criteria as the other equity funds. The large cap fund is benchmarked to the S&P 500, while the other is benchmarked to the Russell 3000. These exhibit some degree of factor tilts, in line with the other funds. They've outperformed lately, particularly in the last five years, less so going back, with slightly higher volatilities than the benchmarks, much in line with the other funds, with very high R^2 and so on. More of the same, really.

https://www.portfoliovisualizer.com/fac ... ssetType=1
https://www.portfoliovisualizer.com/ass ... ingDays=60
http://quotes.morningstar.com/chart/fun ... 2%3A955%7D
===


Factor regressions for the four funds (same info as before, just put together):
https://www.portfoliovisualizer.com/fac ... ssetType=1
Last edited by lack_ey on Wed Jan 11, 2017 1:09 pm, edited 4 times in total.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by lack_ey »

Vanguard Global Minimum Volatility (VMVFX, VMNVX)
$3k min, $50k min investment; ER = 0.27%, 0.21%
$1.6 billion AUM, 57% turnover
Inception December 12, 2013
Managers Michael R. Roach, Binbin Guo, Anatoly Shtekhman
Managed since inception by Vanguard, starting with Roach.

Vanguard Global Minimum Volatility, like other minimum volatility strategies from others, attempts to build a pure stock portfolio with as low a volatility as possible, subject to some constraints. Usually the constraints are on maximum and/or minimum weighting allowed on stocks, sectors weights, country weights if applicable, and so on. Minimum volatility strategies are related to but not the same thing as low volatility funds (or low beta funds, for that matter). Low volatility funds simply own the stocks with low recent past volatility, which tends to mean overweights in utilities and other stocks perhaps a bit more sensitive to (bond) term risk. Min vol formulations go a step further, attempting to determine and exploit the covariance between stocks. The idea is that a stock with moderate volatility but low correlation to your existing allocation may reduce portfolio volatility more than another stock with slightly lower volatility but higher correlation to what you already have. As such a min vol fund will tend to include low vol stocks but will venture a bit outside them as well.

Generally, a min vol allocation will have lower market beta and will probably be expected to lag most stock funds in a bull market but not lose as much in a bear market. Over the long term, you should probably not expect as high of a return, but the volatility is very likely to be lower.

Vanguard's fund invests in stocks around the world, over 40% outside the US, hedging currency exposure in ex-US stocks to reduce volatility. Since inception, the currency hedging has been a significant tailwind, meaning that the fund has returned much more than the typical global stock fund. Vanguard's optimization algorithm looks at stock historical volatility, factor exposures, and correlations to construct the portfolio, subject to constraints of 5% overweights/underweights in terms of sector and country exposure as well as growth/value bias.

I'm including some factor analysis but note that the fund doesn't line up with the global stock data that well. Also, PV doesn't have a daily return factor analysis (only for monthly data, unlike for the US funds analyzed above), and the fund is only three years old, so note that the confidence intervals are much larger here. Don't take these results too seriously. And certainly don't extrapolate the relative fund returns out to the future. The most interesting result here is that the fund has managed to be less volatile than all of its competitors. Volatility and relative volatility is usually a little more consistent than relative returns. We haven't even seen half a business cycle here, but the results at least on this front are encouraging.

This fund has been significantly discussed on the forums a few times over the years so you can find more information by searching.

https://www.portfoliovisualizer.com/fac ... ssetType=1
https://www.portfoliovisualizer.com/ass ... ingDays=60
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Vanguard Alternative Strategies (VASFX)
unavailable to the public; ER = 0.40%
$232 million AUM, 25% turnover
Inception August 11, 2015
Managers Michael R. Roach, Binbin Guo, Anatoly Shtekhman
Managed since inception by Vanguard, starting with Roach.

Vanguard Alternative Strategies is a liquid alternatives fund using five approximately equally weighted strategies internally, and as such is categorized by Morningstar in the multialternatives category. The fund may add to and change its strategies in the future, as with the other funds.

The current five strategies are as follows:
  • Long/short equity - long low volatility stocks, short high volatility stocks (betting against beta)
  • Event-driven - a traditional hedge fund category, including mergers/acquisitions arbitrage and the likes
  • Fixed income - short short-term bonds, long longer-term bonds (Treasuries), i.e. a bet on carry / yield curve slope
  • Currencies - long currencies for countries with good fundamentals, short currencies for countries with bad fundamentals, hoping to capture positive exchange rate changes
  • Commodity-linked investments - trades commodity futures contracts in an attempt to earn risk premium associated with inventory level
Each strategy is leveraged to give a roughly equal risk weighting in each. So far the realized volatility has been fairly low, not too much higher than bonds, while earning a slightly positive return that so far has been uncorrelated with stocks and only a little correlated with bonds, probably from the fixed income substrategy. Notice that the equity-related strategies do not overlap with the market neutral fund.

Factor analysis won't turn up anything of interest yet, and I doubt it'd regress on too much anyway. And of course a year of performance doesn't say much. But I think based on the strategies and what it's shown so far, if you were interested in Managed Payout but wary of that fund's investment in Alternative Strategies, this shouldn't scare you off, I don't think.

Because it's not directly investable for any of us anyway, and I can't find much information about what it does, let's move on to the last fund. There isn't much performance history to look at, but it's at least made money so far.

https://www.portfoliovisualizer.com/ass ... ingDays=60
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Vanguard Managed Payout (VPGDX)
$25k min investment; ER = 0.23%
$1.7 billion AUM, 29% turnover
Inception May 2, 2008
Managers John Ameriks, Anatoly Shtekhman, Michael H. Buek
Managed since inception by Vanguard, starting with Buek.

Vanguard Managed Payout is a fund-of-funds using other Vanguard funds. It's intended as a retirement income distribution platform, attempting to distribute about 4% of its assets yearly in regular monthly installments. The long-term absolute return goal is about 4% above inflation to match the distribution rate. As such it has an endowment-like mandate, and in fact the underlying portfolio can be described as a mini-endowment-style allocation, with a significant investment in alternatives and a healthy allocation of equities. It is more aggressive and volatile than many retirement income allocations, keeping roughly 60% in stocks. After all, you can't get anything close to 4% above inflation from bonds, so it has to take risks.

The fund has allocations to Alternative Strategies (otherwise not available to individuals), Global Minimum Volatility, Market Neutral, and Vanguard's commodities investment pool that is also not available anywhere else. This fund has been quick to adopt new Vanguard offerings the last few years, such as the international bond index fund, Global Minimum Volatility, and Alternative Strategies. The allocation the last three years is detailed below:

Image

As you can see, the fund engages in some market timing but in a relatively restrained manner. It certainly got the call on an emerging markets comeback early (read: wrong), but at least that was only a 5% position? It's no go-anywhere fund, though, that's for sure.

The fund used to be a series of three different funds with different payouts and portfolio compositions, but these were merged a few years back. The longer-term performance history is not that good, but the current portfolio is not really the same as it used to be, so you can argue both ways about the applicability of that longer-term history in evaluating how the fund might do in the future. Either way, including commodities definitely hasn't paid off yet.

This fund has been frequently discussed on the forums, including recently, so there is little to add here.

http://quotes.morningstar.com/chart/fun ... 2%3A955%7D
Last edited by lack_ey on Wed Jan 11, 2017 1:08 pm, edited 4 times in total.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by tj »

Thanks for posting this! Fascinating analysis. The quant group also manages roughly 1/3 of VEIRX, Vanguard Equity Income, with Wellington managing the rest of the fund.

Strange that the Managed Payout Fund dropped exposure to Global Minimum Volatility recently.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by nisiprius »

The Market Neutral Fund has always seemed to me to be a bad joke. We are looking at a fund that Vanguard puts at the same risk potential category as stocks
Image
in order to get a current SEC yield of 0.05%.
Image
To be sure, using PortfolioVisualizer and a time period of Jan 1999 - Dec 2016 we are seeing a CAGR of 2.77%, which is... something, but it is coupled with a standard deviation of 8.40%, for a Sharpe ratio of 0.15.

By comparison, over the same time period, the Vanguard Short-Term Treasury Fund, VFISX, has a CAGR of 3.25% (higher), a standard deviation of 1.84% (much, much lower), and a Sharpe ratio of 0.81 (much, much higher).

But, people say--in Vanguard's words--"the fund’s return is often uncorrelated to that of the stock market." So even though it's a lousy investment in itself, the idea is that it can still improve a portfolio by erasing some of the volatility of stocks. But can it? Or at least, in the past, would it have?

To begin with, the correlation between VMNFX and Vanguard Total Stock, VTSMX, was -0.05, which is indeed low--very slightly negative. But the Vanguard Short-Term Treasury Fund had an even lower correlation, -0.17. That doesn't necessarily tell the whole story, because the ability of an asset to erase or at least smudge the volatility of another asset depends on it having some volatility of its own.

So, using PortfolioVisualizer, let's explore the effect of starting with a basic three-fund portfolio of 45% Total Stock, 15% Total International, and... let's say 40% VFISX, because I don't want to put too much weight on the scales by using Total Bond, which I know has had much higher returns than Market Neutral. Then we will see what happens if we plug in Market Neutral instead of Short-Term Treasury. If Market Neutral wipes out some of Total Stock's volatility, we should see an improved Sharpe ratio... and, better yet, we can then increase the stock allocation until we get the same volatility as our three-fund portfolio, and see increased return. So, let's try it.

Portfolio 1: 45% VTSMX, 15% VGTSX, 40% VFISX.
Portfolio 2: 45% VTSMX, 15% VGTSX, 40% VMNFX.

Source

Image

And we don't need to go any farther. Replacing the plain old boring short-term Treasury fund with Market Neutral made the portfolio worse in every way. The Market Neutral added volatility of its own, and did not smudge out enough of the stock volatility to make up for it.

(I also tried starting with 45% Total Stock, 15% Total International, and 40% Total Bond, and replacing half of Total Bond with Market Neutral. That made it worse. Replacing all of Total Bond with Market Neutral made it much worse. The low return of Market Neutral compared to Total Bond was bad, and, once again, Market Neutral added more volatility of its own than it erased from the stocks).

Honestly, I just cannot see what the Market Neutral Fund is supposed to be good for. I'm not being snarky, I'm just baffled.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by lack_ey »

I wasn't expecting a critique on the concept of market neutral funds, but okay, let's do that here.
nisiprius wrote:The Market Neutral Fund has always seemed to me to be a bad joke. We are looking at a fund that Vanguard puts at the same risk potential category as stocks
Image
in order to get a current SEC yield of 0.05%.
Image
To be sure, using PortfolioVisualizer and a time period of Jan 1999 - Dec 2016 we are seeing a CAGR of 2.77%, which is... something, but it is coupled with a standard deviation of 8.40%, for a Sharpe ratio of 0.15.
First of all, I don't know why anybody ever cites the Vanguard risk rating from the personal investor website. They're kind of arbitrarily set and I would imagine are not determined in any rigorous way or by the portfolio manager. It's not sufficiently granular to pick up on real differences and then sometimes is very arguably wrong, like here.

I don't think anybody seriously believes a 1x up, 1x down market neutral fund with constrained 0.5% max positions per security and sector neutral somehow has comparable risk to a 100% long stock fund. That's just not credible and doesn't follow empirically either. A 3/5 on Vanguard's scale would make a lot more sense. Possibly even 2/5. You can easily make plenty of cases for why you don't like it or think it's a bad idea, so don't settle for and start with this line of attack.

Would you expect any SEC yield from a fund that's 1x long, 1x short? This implies dividends on the long side are greater than borrowing costs and dividends on the short side plus management fees, which I guess would arise from a sufficient value/dividend tilt with low enough fees and costs. When I saw that earlier, I was honestly surprised it wasn't 0% as it's usually 0% and I think earlier was 0% for that fund. Anyway, what even was the point of bringing that up? This is kind of like pointing out that a gold ETF has no SEC yield. It's by design and is inherent to the strategy and underlying. People can argue endlessly about including gold or not but if you brought that up in one of the gold threads, people would look at you funny, and that's kind of how I think people should feel about this too.


As for all the portfolio analysis of and including the Vanguard fund, that is all well and good and sort of relevant. Clearly, if a fund has performance that bad relative to other things over a given period, you don't want any of it at all. The higher the returns and less correlated it is, the more useful it might be.

As described before, Vanguard Market Neutral wasn't even a Vanguard fund to begin with, and much of the period of underperformance is attributable to a prior subadvisor no longer used. Others could tell the history better, but the point is that the performance history isn't indicative of things relating to the current strategy.

The challenge with a market neutral fund is that by default you should assume there are zero returns before costs. Negative after costs. After all, in say a CAPM world, if you are long 1 beta, short 1 beta, you end up with zero beta and your returns are zero. What you have is something that might be uncorrelated with the market but it's not actually doing you any good. You need a more positive Sharpe ratio to be worth something. This requires some alpha. Or non-market-beta factor exposure, which effectively are CAPM alpha over a period in which those factors have positive returns.

The strategy here is to do some kind of quant things in security selection to generate CAPM alpha, many of which in fact seem to overlap with the world of factor tilting, loading on value/momentum/profitability. If these things generate positive returns in the future, the fund may be able to offer returns nontrivially above costs and thus improve portfolio allocations. In the very least, recall that according to your own analysis elsewhere, if something has zero correlation with your portfolio and positive Sharpe ratio, adding some (at least to a certain point) will improve portfolio Sharpe ratio.

Now, one possible objection here even if you'll allow the above is that a market neutral fund is a waste of space/dollars in that it is zero net invested and will have too low a return on average. Improving Sharpe is okay, but if it's by reducing both risk and return, you may not be interested. That's fair, but if you allow for overall portfolio leverage then it's less a concern.


Because that wasn't long enough, let's start over. Imagine that you're investing in active funds, factor funds, or otherwise anything other than the cheapest possible index fund covering a category. Why would you ever do this? Presumably you're looking for better risk/return or some other characteristics, based on factors or manager skill or whatever else. I don't think this should be difficult for someone to imagine, even if they don't do any of this themselves. What I want to show is that using a market neutral fund is an extension of the same underlying concepts and not in theory much of a leap.

Let's examine the performance of an active fund in category X (e.g. large cap US stocks). One way to decompose this is [performance of X] + [performance of the difference portfolio] - [costs including ER and trading costs]. The difference portfolio you can think of as the active share, the net overweights and underweights relative to X. If the things the fund overweights do better than the things the fund underweights, this is good for the fund and if sufficiently high (above costs), then the fund will outperform X and index funds for X.

Basically, the difference portfolio determines the tracking error and relative performance. A closet indexing fund will have a relatively small difference portfolio in terms of weightings and thus a relatively low tracking error.

If you believe a manager is doing some decent things, then this means that you think the differences they have with the benchmark are more likely than not to be beneficial and that they'll cover the costs and more on average or at least over half the time.

You can think of an equity market neutral fund as pure difference portfolio relative to cash. All the stocks long are overweights relative to cash, and all the stocks short are underweights relative to cash. And with a 1x long and 1x short fund, this is an active share of 200%.

The active share in the other funds is much smaller because those are long-only and relatively constrained. With the market neutral fund, Vanguard is offering that larger active share only with a 25 bp expense ratio. (Warning: note that the short side portfolio has additional costs in terms of borrowing on short sales, so that is an additional consideration on top of the management costs.)

Anyway, that's the point: if you believe in their stock selection strategy and procedure, you may see a higher effect from said strategy in the market neutral fund than in the others. If you don't think this effect is positive on average for any of the funds, then obviously you'd stay away from all of them. But if you do think it's positive, then there's maybe a decision to be made and some justification for considering a fund of this type.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by matjen »

Lack_ey thank you for the very interesting post. Regarding VMNFX, I just have to weasel in that QSPIX rules! ;-) (Though flat year this year.) :-(

Happy New Year!
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by matto »

nisiprius wrote: But, people say--in Vanguard's words--"the fund’s return is often uncorrelated to that of the stock market." So even though it's a lousy investment in itself, the idea is that it can still improve a portfolio by erasing some of the volatility of stocks. But can it? Or at least, in the past, would it have?

To begin with, the correlation between VMNFX and Vanguard Total Stock, VTSMX, was -0.05, which is indeed low--very slightly negative. But the Vanguard Short-Term Treasury Fund had an even lower correlation, -0.17. That doesn't necessarily tell the whole story, because the ability of an asset to erase or at least smudge the volatility of another asset depends on it having some volatility of its own.
To be clear, anyone who says the purpose of a market neutral (aka hedge fund) strat is to "erase" volatility is wrong. Market neutral, is at best, correlation 0. A correlation of -0.05 is identical to -0.1 to 0.1, for all intents and purposes.

Alright, so if you cannot 'erase' volatility, what's the point? The point is that volatility of uncorrelated assets does not sum, (it square root sums). So If stocks are 15% volatility and this market neutral fund is 5% volatility, then a 50/50 mix will be < 10% volatility (around 8%). If you have two stock funds, one with 15% and one with 5% volatility, then the 50/50 mix will have closer to 10% volatility.

So, what's the point of being an uncorrelated asset? You are willing to accept lower risk adjusted returns since adding it to a portfolio will not increase the risk as much as adding a purely correlating asset (recall that you get a 2% volatility savings by using a market neutral mix above). That being said, the market neutral fund still needs to have decent risk adjusted returns. Just not as decent as equities (since you are already taking so much equity risk).

If you had a truly negative correlation asset to equities (which probably has a negative expected rate of return, since anyone would love to have it), then more volatility is better (as long as you don't have to have more negative returns). In market neutral, better risk adjusted returns (aka holding return constant, lowering volatility is better).

That being said, 0.15 sharpe is so low that you cannot be confident it even works. It would take at least 100 years to be confident a 0.15 sharpe strategy is working.

Another point: People like to say such and such quant strategy has *as much evidence* as market beta. I believe I've heard this used to justify the value premium as being as persistent as beta (implying it is as probable).

The problem is that there are priors at work. Market beta has a strong prior that it should exist. Any quant 'alpha' or 'alternative beta' has a much weaker reason for why it should exist. So like I said, > 100 years to be somewhat confident a sharpe 0.15 quant strategy is not luck.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by nisiprius »

matto wrote:...To be clear, anyone who says the purpose of a market neutral (aka hedge fund) strat is to "erase" volatility is wrong. Market neutral, is at best, correlation 0. A correlation of -0.05 is identical to -0.1 to 0.1, for all intents and purposes.
Agreed. I thought I was being creative in using the phrasing "erase or at least smudge it." I believe that there are things with essentially zero correlation in the real world. I don't believe in things with negative correlation in the real world unless it's a chance sampling fluctuation, or unless it's a synthetic construct in which you get a rabbit out of a hat because you put the rabbit into the hat first, and you pay through the nose for the rabbit.
Alright, so if you cannot 'erase' volatility, what's the point? The point is that volatility of uncorrelated assets does not sum, (it square root sums). So If stocks are 15% volatility and this market neutral fund is 5% volatility, then a 50/50 mix will be < 10% volatility (around 8%). If you have two stock funds, one with 15% and one with 5% volatility, then the 50/50 mix will have closer to 10% volatility.

So, what's the point of being an uncorrelated asset? You are willing to accept lower risk adjusted returns since adding it to a portfolio will not increase the risk as much as adding a purely correlating asset...
Sure. That's the generality, and I understand it. In theory, you could have an asset that has higher volatility than the original portfolio, yet adding it would reduce the volatility of the portfolio. In theory, you could improve the Sharpe ratio. And if you can improve the Sharpe ratio, then in theory you can adjust the allocations and take the improvement in the form of "same risk, more return."
...That being said, 0.15 sharpe is so low that you cannot be confident it even works...
And that's my point. With those kinds of numbers for return and volatility, It's a joke.

It would take something like a correlation miracle for an asset with
-->a 2.77% return, an 8.40% standard deviation, and an 0.15 Sharpe ratio
to improve a portfolio that already had
-->an 5.18% return and an 8.82% standard deviation, and an 0.41 Sharpe ratio.

To put it another way, over the same time period, Total Bond had
-->a 4.63% return, a 3.50% standard deviation, and an 0.80 Sharpe ratio.

Total Bond was just plain a far better investment in every possible way, and not by a small amount. Words like "crush" and "spank" and "plethysmogrammatrize*" come to mind. To believe that an investment that is so much worse than Total Bond is going to be an improvement over Total Bond in a portfolio is to believe in some kind of correlation miracle.

That miracle never happened in the last seventeen years, when and why do we expect it to happen going forward?

*Made-up word. Don't bother looking it up. There is such a thing as a "plethysmograph," however, and it's used in medical sleep studies but you don't want to know how.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by nisiprius »

lack_ey wrote:I don't know why anybody ever cites the Vanguard risk rating from the personal investor website. They're kind of arbitrarily set and I would imagine are not determined in any rigorous way or by the portfolio manager. It's not sufficiently granular to pick up on real differences and then sometimes is very arguably wrong, like here.
I like the risk ratings precisely because they are broad, and therefore differences are probably meaningful when you see them. Unlike, for example, claims that Vanguard's international bond fund is good because it reduced standard deviation of a portfolio from 8.6 to 8.5 (something like that). I don't know how Vanguard determines them--I think you are right, "arbitrarily," or, to say it in a nicer say, "using personal judgement." My guess, but of course it's only a guess, is that it reflects their statement on the same page that
Unlike other Vanguard funds, this fund uses long- and short-selling strategies, which involve specific risks not apparent in traditional mutual funds.
That, of course, is a common topic of spirited discussion here. Do long-short funds involve extra risk in the sense of Taleb's "fragility" or "black swans" that don't show up in traditional measures? The discussions always go the same way: the people managing the funds say they don't, and the people who are skeptical point to blowups of other funds that did, and the people managing the funds say that what they are doing is totally different.
lack_ey wrote:...As for all the portfolio analysis of and including the Vanguard fund, that is all well and good and sort of relevant. Clearly, if a fund has performance that bad relative to other things over a given period, you don't want any of it at all.
Yes, and your posting is a review of a group of Vanguard funds, and I'm saying this particular Vanguard fund looks like a bad joke to me.
The higher the returns and less correlated it is, the more useful it might be...
Well, yeah.
As described before, Vanguard Market Neutral wasn't even a Vanguard fund to begin with, and much of the period of underperformance is attributable to a prior subadvisor no longer used.
Most mutual funds look better if you throw out the data from the periods when it looked worse. What's wrong with the prior subadvisor?
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by grayfox »

lack_ey wrote:Vanguard Global Minimum Volatility (VMVFX, VMNVX)
$3k min, $50k min investment; ER = 0.27%, 0.21%
$1.6 billion AUM, 57% turnover
Inception December 12, 2013
Managers Michael R. Roach, Binbin Guo, Anatoly Shtekhman
Managed since inception by Vanguard, starting with Roach.

Vanguard Global Minimum Volatility, like other minimum volatility strategies from others, attempts to build a pure stock portfolio with as low a volatility as possible, subject to some constraints. Usually the constraints are on maximum and/or minimum weighting allowed on stocks, sectors weights, country weights if applicable, and so on. Minimum volatility strategies are related to but not the same thing as low volatility funds (or low beta funds, for that matter). Low volatility funds simply own the stocks with low recent past volatility, which tends to mean overweights in utilities and other stocks perhaps a bit more sensitive to (bond) term risk. Min vol formulations go a step further, attempting to determine and exploit the covariance between stocks. The idea is that a stock with moderate volatility but low correlation to your existing allocation may reduce portfolio volatility more than another stock with slightly lower volatility but higher correlation to what you already have. As such a min vol fund will tend to include low vol stocks but will venture a bit outside them as well.

Generally, a min vol allocation will have lower market beta and will probably be expected to lag most stock funds in a bull market but not lose as much in a bear market. Over the long term, you should probably not expect as high of a return, but the volatility is very likely to be lower.

Vanguard's fund invests in stocks around the world, over 40% outside the US, hedging currency exposure in ex-US stocks to reduce volatility. Since inception, the currency hedging has been a significant tailwind, meaning that the fund has returned much more than the typical global stock fund. Vanguard's optimization algorithm looks at stock historical volatility, factor exposures, and correlations to construct the portfolio, subject to constraints of 5% overweights/underweights in terms of sector and country exposure as well as growth/value bias.

I'm including some factor analysis but note that the fund doesn't line up with the global stock data that well. Also, PV doesn't have a daily return factor analysis (only for monthly data, unlike for the US funds analyzed above), and the fund is only three years old, so note that the confidence intervals are much larger here. Don't take these results too seriously. And certainly don't extrapolate the relative fund returns out to the future. The most interesting result here is that the fund has managed to be less volatile than all of its competitors. Volatility and relative volatility is usually a little more consistent than relative returns. We haven't even seen half a business cycle here, but the results at least on this front are encouraging.

This fund has been significantly discussed on the forums a few times over the years so you can find more information by searching.

https://www.portfoliovisualizer.com/fac ... ssetType=1
https://www.portfoliovisualizer.com/ass ... ingDays=60
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
:thumbsup Good report.

:?: One question I have: Is Vanguard Global Minimum Volatility Fund (VMNVX) the same thing as a Minimum Variance Portfolio (MVP)?

The Minimum Variance Portfolio (MVP) or Global Minimum Variance Portfolio (GMVP) is something that I learned about in Modern Portfolio Theory. The GMVP is the portfolio with the least variance (i.e. the global minimum). On a Mean-Variance graph, it is the portfolio that lies on the tip of the Markowitz bullet.

Image

What I find appealing about the GMVP is that it does not require expected returns to calculate. It only requires variances and covariances. Contrast this with the Tangency Portfolio TP which requires mean returns, variances and covariances.

Also, VMNVX appears to be working. Compare VMNVX Standard Deviation (6.90%) to Total World (VTWSX) (10.94%)

Code: Select all

#     Initial Balance     Final Balance     CAGR     Std.Dev.     Best Year     Worst Year     Max. Drawdown     Sharpe Ratio     Sortino Ratio     US Mkt Correlation
1     $10,000     $11,065      3.43%      10.94%     8.67%     -2.02%     -13.56%      0.35     0.57     0.95
2     $10,000     $13,092      9.39%      6.90%     13.92%     5.87%     -4.58%      1.32     2.57     0.86
Last edited by grayfox on Sun Jan 01, 2017 1:56 pm, edited 1 time in total.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by matto »

nisiprius wrote: It would take something like a correlation miracle for an asset with
...

To believe that an investment that is so much worse than Total Bond is going to be an improvement over Total Bond in a portfolio is to believe in some kind of correlation miracle.
Nitpick: The correlation miracle did happen. It had 0 correlation. The 'return' miracle did not happen. Note: it's trivial to get a correlation miracle. Cash has a 0 correlation. The hard part is getting decent returns with 0 correlation. [Or getting 0 returns with negative correlation.]

As to a negative correlation and positive return, I agree with you that the odds are against such an asset existing. Negative correlations are easy (e.g. put options), but negative correlations with positive return are the hard part.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by nisiprius »

Looking at market neutral funds in general, let's accept the premise that VMNFX isn't a fair example, so let's do a reality check with some other fund. Here's what I'm going to do. I'm going to look for a market neutral fund that has as much or more history than VMNFX (which started on 10/19/1998), and pick the one that comes alphabetically first. That's the best I can do as an unbiassed pick. I swear that I don't know personally know enough about them to know names and performance, I don't think I'm making a bad choice unconsciously.

And the one that seems to fit that description is:
CVSIX Calamos Market Neutral Fund Class A
"The time period was automatically adjusted based on the available data (Sep 1990 - Dec 2016) for the selected asset: Calamos Market Neutral Fund Class A (CVSIX)"

Over that time period, it's had a CAGR 6.34%, versus 5.81% for Total Bond, so I say it's reasonable to compare it against Total Bond. Hmmm... it turns out that the limiting factor on the time period here is Total International, "The time period was automatically adjusted based on the available data (May 1996 - Dec 2016) for the selected asset: Vanguard Total International Stock Index Fund (VGTSX)." I'll stick with that, though.

Here goes. OK, switching in the Calamos fund produced a tiny, I'd say negligible increase in CAGR, but a bigger increase in standard deviation... so I am going to add a third portfolio in which I hand-adjust asset allocations to equalize the risk (standard deviation) of the whole portfolio as best I can. It turns out that to do that I need to boost the Market Neutral fund quite a bit and cut down the stock allocations quite a bit.

Source

Portfolio 1: 45% Total Stock, 15% Total International and 40% of either Total Bond.
Portfolio 2: 45% Total Stock, 15% Total International and 40% Calamos Market Neutral.
Portfolio 3: 35% Total Stock, 11% Total International and 54% Calamos Market Neutral.

Image

I would say that the portfolios (2, red; 3, orange) including the market neutral fund were slightly worse in every way than those that just used the boring, straightforward, dumb bond index fund. Slightly worse, but worse. I don't see any compelling evidence for value of using the market neutral fund, to say nothing of nagging doubts about the expense ratio and the possible "fat tails" concerns of using a tricky balance of stocks in lieu of bonds.

P.S. If we remove Total International and just use straight Total Stock, then we can go all the way back to inception for the Calamos Market Neutral Fund--the whole analysis covers a respectable 24 years, Jan 1993 - Dec 2016. It also means we're scrambling our endpoints just a little so as not to accidentally keep replying some chance-bad chunk of time, and furthermore it means we get to include the effects of the 1994 "bond massacre" on Total Bond. The general result is the same, you can view it here. In this case, swapping out Total Bond in favor of Calamos Market Neutral resulted in exactly the same return (CAGR), but a distinct increase in risk. If we adjust allocations to equalize risk, then the portfolio that used the market neutral fund had a lower return. Not by an awful lot, 7.62% instead of 8.09%.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by lack_ey »

nisiprius wrote:
lack_ey wrote:I don't know why anybody ever cites the Vanguard risk rating from the personal investor website. They're kind of arbitrarily set and I would imagine are not determined in any rigorous way or by the portfolio manager. It's not sufficiently granular to pick up on real differences and then sometimes is very arguably wrong, like here.
I like the risk ratings precisely because they are broad, and therefore differences are probably meaningful when you see them. Unlike, for example, claims that Vanguard's international bond fund is good because it reduced standard deviation of a portfolio from 8.6 to 8.5 (something like that). I don't know how Vanguard determines them--I think you are right, "arbitrarily," or, to say it in a nicer say, "using personal judgement." My guess, but of course it's only a guess, is that it reflects their statement on the same page that
Unlike other Vanguard funds, this fund uses long- and short-selling strategies, which involve specific risks not apparent in traditional mutual funds.
That, of course, is a common topic of spirited discussion here. Do long-short funds involve extra risk in the sense of Taleb's "fragility" or "black swans" that don't show up in traditional measures? The discussions always go the same way: the people managing the funds say they don't, and the people who are skeptical point to blowups of other funds that did, and the people managing the funds say that what they are doing is totally different.
You're reading the wrong people or overgeneralizing. Sometimes people bring up non sequiturs or bring up extremely stretched comparisons and these are correctly dismissed as totally different.

But on the other hand anyone claiming there's no risk in shorting or leverage or anything like that is being daft. Specifically with a market neutral fund, yes there is some additional "fragility" of at least some sort. If nothing else a fund that's 200% invested (gross) has more places to be wrong than a fund that is 100% net invested.

Also, it's not just a matter of traditional measures [of risk]. The problem more generally is that the performance history only encompasses realized outcomes, which over a finite number of years may not include any significant left- or right-tail events. There's no objective measure, traditional or not, that can really account for things that haven't happened yet, and what can happen cannot be inferred well from what has happened. Furthermore, measures based on data or statistical characterizations of let's say standard deviation, kurtosis, skewness, etc. simply look at the variability of the given observed sample path (along the time axis), which does not in general address the dispersion of possible futures.

Anyway, how would you analyze and characterize the risk level for the Vanguard Market Neutral? As risky as stocks? More? Less? How much so? In which ways? What do you think (very approximately) is the chance that it is more volatile than the stock market in a given year?

Despite all the risks and unknowns I think it's safe to say it's not as risky as stocks. If it were 4x up, 4x down, that would be a different matter. Regardless it's not likely to be much correlated with the market.
nisiprius wrote:
lack_ey wrote:...As for all the portfolio analysis of and including the Vanguard fund, that is all well and good and sort of relevant. Clearly, if a fund has performance that bad relative to other things over a given period, you don't want any of it at all.
Yes, and your posting is a review of a group of Vanguard funds, and I'm saying this particular Vanguard fund looks like a bad joke to me.
You mean historically a joke, or forward looking?
nisiprius wrote:
As described before, Vanguard Market Neutral wasn't even a Vanguard fund to begin with, and much of the period of underperformance is attributable to a prior subadvisor no longer used.
Most mutual funds look better if you throw out the data from the periods when it looked worse. What's wrong with the prior subadvisor?
Prior to it becoming a Vanguard fund, the expense ratio was higher, I would assume. I didn't really check the past history that closely and wouldn't know where to look.

AXA Rosenberg is kind of known now for going "oops" and disclosing that there was a coding error that screwed up their models, and has been ditched from plenty of fund management. Supposedly it didn't impact Vanguard Market Neutral but none of that really inspires confidence. It's hard to make a case about manager skill in general as luck plays such a large role, but we're looking at multiple years across multiple funds. It may not be statistically significant and it's not an easy call, but it doesn't look good.

If you at least partially buy the argument from Fidelity/American Funds and maybe some others, there is possibly something to the belief that the large fund companies are able to do better with active management. This would be a point in favor of Vanguard and its resources and so on. It's at least plausible.

What we do know is that the strategy used in the past is not the same as the one used today. Furthermore, the strategy used today, based on descriptions available, use concepts and screens that are similar to and overlap with factors. This is corroborated by the factor regressions.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by lack_ey »

grayfox wrote: :?: One question I have: Is Vanguard Global Minimum Volatility Fund (VMNVX) the same thing as a Minimum Variance Portfolio (MVP)?

The Minimum Variance Portfolio (MVP) or Global Minimum Variance Portfolio (GMVP) is something that I learned about in Modern Portfolio Theory. The GMVP is the portfolio with the least variance (i.e. the global minimum). On a Mean-Variance graph, it is the portfolio that lies on the tip of the Markowitz bullet.

Image

What I find appealing about the GMVP is that it does not require expected returns to calculate. It only requires variances and covariances. Contrast this with the Tangency Portfolio TP which requires mean returns, variances and covariances.
If I am reading things correctly, they are effectively attempting to find the GMVP.

Except that their optimization is constrained in terms of sector/country weights and more, which means that they're not actually targeting the GMVP. They should be attempting to find the closest point, most to the left, that doesn't violate their constraints. And of course their actual portfolio doesn't follow their own internal target exactly because real markets aren't frictionless and they're mindful of trading costs.

To me the surprising thing here is how they've been able to achieve lower volatility than other min vol formulations. But there are multiple confounding variables so it's hard to say how and why. It's been less volatile than iShares Edge MSCI Min Vol USA (USMV), for example. What I want to know is if Vanguard's optimization is superior to MSCI's (estimating covariances etc. more accurately, let's say), or if adding ex-US currency hedged equities is what did the trick in lowering vol. Seems plausible that there are lower correlations to be exploited if investing across countries. Maybe both? Maybe a streak of good luck? Or less restrictive constraints?
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by daffyd »

lack_ey wrote: To me the surprising thing here is how they've been able to achieve lower volatility than other min vol formulations. But there are multiple confounding variables so it's hard to say how and why. It's been less volatile than iShares Edge MSCI Min Vol USA (USMV), for example. What I want to know is if Vanguard's optimization is superior to MSCI's (estimating covariances etc. more accurately, let's say), or if adding ex-US currency hedged equities is what did the trick in lowering vol. Seems plausible that there are lower correlations to be exploited if investing across countries. Maybe both? Maybe a streak of good luck? Or less restrictive constraints?
I'm dredging my memory but there are a few differences. The main are the inclusion of a broader universe (global stocks) and the way they include them. However, for example, iShares Edge MSCI Min Vol Global ETF includes global stocks.

The other difference is a bit more subtle. The US version of the iShares product is optimized in USD, so the optimizer doesn't use the difference between currency volatility and stock volatility (i.e. low vol could partly be from currency fluctuations or lack thereof). If you think there might be a low-vol/beta equities anomaly then the academic studies were largely on stocks, not on currencies. The Vanguard (and AQR) products instead use local-currency volatility (by switching off the currency factors in the optimizer) and then Vanguard hedges out most of the currency risk.

They might have less restrictive constraints; I don't recall the exact industry/country constraints (e.g. +/- 2.5%) but they were of similar character to the MSCI global ones (industry, country, plus also non-relevant factor styles restricted to +/-0.25 standard deviations - think of this as mitigating unexpected factor loadings such as a negative exposure to value). Vanguard uses Axioma rather than MSCI Barra correlation estimates but I don't see that making much difference.
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lack_ey
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by lack_ey »

daffyd wrote:
lack_ey wrote: To me the surprising thing here is how they've been able to achieve lower volatility than other min vol formulations. But there are multiple confounding variables so it's hard to say how and why. It's been less volatile than iShares Edge MSCI Min Vol USA (USMV), for example. What I want to know is if Vanguard's optimization is superior to MSCI's (estimating covariances etc. more accurately, let's say), or if adding ex-US currency hedged equities is what did the trick in lowering vol. Seems plausible that there are lower correlations to be exploited if investing across countries. Maybe both? Maybe a streak of good luck? Or less restrictive constraints?
I'm dredging my memory but there are a few differences. The main are the inclusion of a broader universe (global stocks) and the way they include them. However, for example, iShares Edge MSCI Min Vol Global ETF includes global stocks.

The other difference is a bit more subtle. The US version of the iShares product is optimized in USD, so the optimizer doesn't use the difference between currency volatility and stock volatility (i.e. low vol could partly be from currency fluctuations or lack thereof). If you think there might be a low-vol/beta equities anomaly then the academic studies were largely on stocks, not on currencies. The Vanguard (and AQR) products instead use local-currency volatility (by switching off the currency factors in the optimizer) and then Vanguard hedges out most of the currency risk.

They might have less restrictive constraints; I don't recall the exact industry/country constraints (e.g. +/- 2.5%) but they were of similar character to the MSCI global ones (industry, country, plus also non-relevant factor styles restricted to +/-0.25 standard deviations - think of this as mitigating unexpected factor loadings such as a negative exposure to value). Vanguard uses Axioma rather than MSCI Barra correlation estimates but I don't see that making much difference.
Yeah, iShares Edge MSCI Min Vol Global ETF (ACWV) doesn't use currency hedging, right? IMHO it does make more sense to currency hedge in a global min vol fund. This is especially the case for how Vanguard is using the fund, as part of a retirement income distribution fund where low portfolio vol helps.

i mentioned iShares Edge MSCI Min Vol USA ETF (USMV) instead as a comparison to Vanguard's fund because USMV basically had the same vol as ACWV and I didn't want to get into the details of ACWV not currency hedging. Either way, as you say, there are some differences.

Without having seen the data, I also assume it would be easier (higher accuracy) to estimate local currency vol and correlations across countries when assuming you're going to currency hedge. Currency movements aren't a random walk but I don't see them helping out, adding some noise to estimates. Or am I missing something here?

Anyway, I wasn't aware of which correlation estimates Vanguard uses, so thanks for that info and the rest.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by lack_ey »

Earlier I skipped over (well, didn't notice) two more institutional funds the group ran: Vanguard Structured Large-Cap Equity and Vanguard Structured Broad Market. These are relatively small funds that are closing soon but I thought I should mention them for completeness, so I added a very brief description and links to the second post. No surprise: they use the same strategy, with similar results.

Morningstar story:
http://beta.morningstar.com/articles/78 ... funds.html

Thread here:
viewtopic.php?f=1&t=207933&newpost=3189042
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by billyv »

Just FYI: Today's Sunday NY Times has a section on mutual funds and ETF's, including a round-up of "leaders" and "laggards" over 3-month, 12-month and 5-year time periods. Among the "leaders" in the 5-year category are two Vanguard funds: Vanguard Capital Opportunity (VHCAX) (closed to new investors :annoyed) with returns of 17.97% and Vanguard Strategic Equity (VSEQX) with returns of 17.34%. Interestingly, both funds are lumped in with VG's midcap lineup, although VHCAX invests in "companies of various sizes" according to the fund description, while VSEQX is basically a mid/small blend. For the record, Legg Mason Opportunity and Primecap Odyssey Aggressive Growth topped the 5-year "leaders" list with returns of 21.67% and 20.65, respectively. (I'm assuming, of course, that these numbers don't include fees, taxes, etc.)
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by lack_ey »

billyv wrote:Just FYI: Today's Sunday NY Times has a section on mutual funds and ETF's, including a round-up of "leaders" and "laggards" over 3-month, 12-month and 5-year time periods. Among the "leaders" in the 5-year category are two Vanguard funds: Vanguard Capital Opportunity (VHCAX) (closed to new investors :annoyed) with returns of 17.97% and Vanguard Strategic Equity (VSEQX) with returns of 17.34%. Interestingly, both funds are lumped in with VG's midcap lineup, although VHCAX invests in "companies of various sizes" according to the fund description, while VSEQX is basically a mid/small blend. For the record, Legg Mason Opportunity and Primecap Odyssey Aggressive Growth topped the 5-year "leaders" list with returns of 21.67% and 20.65, respectively. (I'm assuming, of course, that these numbers don't include fees, taxes, etc.)
Vanguard Capital Opportunity has been large cap growth as an average for a while. It's another one of the PRIMECAP managed funds that are closed now, a lot of which had good performance the last several years in part from overweighting healthcare and here tech.

Mutual fund performance unless specified otherwise is always going to be net of fees but with taxes not considered (some hold in tax-advantaged accounts anyway and different people see different tax rates so this is probably appropriate).

Raw performance numbers and relative rankings over a five-year stretch are largely meaningless, though. Alpha tends to be unstable and noisy at best and you can't really count on relative sector performance to drive things from one period to the next, and with traditional active managers you get relatively inconsistent tilts and exposures that are less tractable.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by Theoretical »

The Market Neutral fund has been remarkably tax efficient, including under the period of non-AXA management for the last 6ish years.

http://performance.morningstar.com/fund ... on?t=VMNFX.

http://bit.ly/2loweEM - so far, it's had no to no correlation to any major category of assets.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by azanon »

(Old Thread bump)

So I was curious what VG charged for the commodities in their Managed Payout fund (which was recently changed to 7.5% of the portfolio), and was bored so I calculated it since all of the other ERs are known. The quoted ER for managed payout is 0.34%, which is 100% acquired fund fees.

The only fund I wasn't sure which ER to use was the Alternative strategies fund. If i assumed the commodities were free and i used 0.79% for alternative strategies, the ER for Managed Payout comes out to 0.36%. If i use 0.35% for alternative strategies (again assuming the commodities were free), it comes out to 0.32% ER. And if I assume VG is buying the cheapest commodities ETF (ticker BCI which is based on the bloomberg index), and using 0.35% for alternatives strategies, the managed payout ER comes out to 0.345%.

Conclusion: The commodities are either free, or as cheap as the cheapest out there (BCI). Has anyone ever asked VG what they charge for it or where they get it from for the portfolio?
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by Whakamole »

azanon wrote: Tue Jul 10, 2018 9:47 am (Old Thread bump)

So I was curious what VG charged for the commodities in their Managed Payout fund (which was recently changed to 7.5% of the portfolio), and was bored so I calculated it since all of the other ERs are known. The quoted ER for managed payout is 0.34%, which is 100% acquired fund fees.

The only fund I wasn't sure which ER to use was the Alternative strategies fund. If i assumed the commodities were free and i used 0.79% for alternative strategies, the ER for Managed Payout comes out to 0.36%. If i use 0.35% for alternative strategies (again assuming the commodities were free), it comes out to 0.32% ER. And if I assume VG is buying the cheapest commodities ETF (ticker BCI which is based on the bloomberg index), and using 0.35% for alternatives strategies, the managed payout ER comes out to 0.345%.

Conclusion: The commodities are either free, or as cheap as the cheapest out there (BCI). Has anyone ever asked VG what they charge for it or where they get it from for the portfolio?
The last annual report says it's operated by Vanguard as a unit trust. https://personal.vanguard.com/funds/reports/q14970.pdf, page 21.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by azanon »

Whakamole wrote: Tue Jul 10, 2018 1:27 pm
azanon wrote: Tue Jul 10, 2018 9:47 am (Old Thread bump)

So I was curious what VG charged for the commodities in their Managed Payout fund (which was recently changed to 7.5% of the portfolio), and was bored so I calculated it since all of the other ERs are known. The quoted ER for managed payout is 0.34%, which is 100% acquired fund fees.

The only fund I wasn't sure which ER to use was the Alternative strategies fund. If i assumed the commodities were free and i used 0.79% for alternative strategies, the ER for Managed Payout comes out to 0.36%. If i use 0.35% for alternative strategies (again assuming the commodities were free), it comes out to 0.32% ER. And if I assume VG is buying the cheapest commodities ETF (ticker BCI which is based on the bloomberg index), and using 0.35% for alternatives strategies, the managed payout ER comes out to 0.345%.

Conclusion: The commodities are either free, or as cheap as the cheapest out there (BCI). Has anyone ever asked VG what they charge for it or where they get it from for the portfolio?
The last annual report says it's operated by Vanguard as a unit trust. https://personal.vanguard.com/funds/reports/q14970.pdf, page 21.
That must be the new thing. Invesco Powershares PDBC, and also the new BCI ETF, are Cayman Island based unit trusts as well. Of course I was primarily researching the costs being charged (acquired fund or other fees) to investors for the security.
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by tj »

Apparently Vanguard is reducing the minimum to Alternative Strategies and Market Neutral to $50k. I won't be investing in them.

https://pressroom.vanguard.com/news/Pre ... -Fund.html
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by nisiprius »

I don't get the Market Neutral fund. I truly don't get it. It continues to look like the most pointless fund imaginable.

Since inception, the Vanguard Market Neutral Fund (blue) has returned about the same as a money market fund (green), with far more than ten times the volatility. True, it has beaten the category average for market neutral funds, but that doesn't look like anything to write home about. (I calculate the CAGR for the market neutral category average as 1.50% per year.

Total Bond, VBTLX, yellow, has had more than twice the return, less than half the volatility, more than twenty times (!) the risk-adjusted return... and a correlation with the stock market of -0.08, which is not very different from -0.14 for market neutral.

For those who think that, in combination with stocks, the correlation and volatility can overcome the drag of the low return, I have a challenge: show me a plausible real-world portfolio, with at least ten years of history, using VMNFX, that is better than the same portfolio using VBTLX in place of VMNFX.

(I wanted to try that actual experiment using the Vanguard Managed Payout Fund's current portfolio, but it is currently full of funds with very short histories... and the allocation to VMNFX is now only 4.50%, so I can't imagine it matters much either way).

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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by afan »

I don't get the market neutral fynd either, but for a different reason.

Assume one accepts that there is no reason to expect an active manager to beat the market in picking what stocks to buy. Pretty safe assumption. So why would one expect an active manager to beat the market in picking stocks to short?

The MNF makese sense only if you believe this unique set of geniuses can successfully beat the market long and short. If there were extraordinarily strong evidence in favor of this extraordinary claim, then it might be interesting. Otherwise, I would expect it to match the market on a risk adjusted basis before fees and transaction costs and trail it after. Trail worse after taxes.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by Wind_Reaver »

It continues to look like the most pointless fund imaginable.
Similar funds seem an attempt to pass an easier-to-beat metric (not necessarily returns) as the benchmark for manager outperformance while evading attribution.

Torture stocks just right, produce money market plus x returns at higher cost. Torture bonds just right, produce equity-like returns with lower correlation. Employ derivatives investors are less likely to benchmark performance.

An overabundance of hybrid cleverness.

[ps - The portfolio implications of manfactured correlation are...]
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by dml130 »

Bump.

Wondering if people have any updated opinions on the strategic equity funds, specifically VSEQX (mid cap) and VSTCX (small cap). It appears the fees are lower now (0.17 for VSEQX, 0.26 for VSTCX) and seem reasonable to me for an actively managed fund.

https://investor.vanguard.com/mutual-fu ... file/VSEQX

https://investor.vanguard.com/mutual-fu ... view/vstcx

Thoughts?
AdrianC
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by AdrianC »

We have money in VSEQX in our kids 529 plans. This was chosen in lieu of a small cap value index fund. It has been better than the small cap value index fund, but that's not saying much.

A curious thing I've noticed is VSEQX and Vanguard U.S. Multifactor Fund (VFMFX) track very closely, though VSEQX has done better lately.
dml130
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by dml130 »

Thanks for the reply. It seems like some of the outperformance you mention vs other small cap value funds could simply be due to its not being very heavy on small (it seems to be more mid cap) or value (seems more "blend"), since both factors have been underperformers the past couple years. But if the intent of the fund is to time when those factors are helpful and when they aren't, then that could be a sign that their methods are working. Not sure if that's the case though.

Anyway, one of the reasons I ask about VSEQX and VSTCX is that I have positions in both and I'm trying to clean up and simplify my portfolio (taxable), so I'm trying to figure out if these funds add much beyond my other main funds (RSP equal weight, S&P 600, and S&P 400 value), or if it is reasonable to sell them due to their being redundant (and/or inferior). Or conversely, maybe consider selling my other small/mid cap funds and keep those vanguard actively managed funds?

Any thoughts/opinions?
AdrianC
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by AdrianC »

Yes, you're probably right re: outperformance compared with small cap.

I wouldn't put any active fund in taxable. Been there, made that mistake, not doing that again.
50% of our portfolio is taxable, and it's in cash, ibonds, total market funds and Berkshire.

I'd say VSEQX and VSTCX are redundant for you.
dml130
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Re: A look at funds managed by the Vanguard Quantitative Equity Group (VUVLX, VSEQX, VSTCX, VMNFX, VMNVX, VASFX, VPGDX)

Post by dml130 »

Thanks for your input, much appreciated.
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