Vanguard believes in active managment

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Calygos
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Vanguard believes in active managment

Post by Calygos » Mon Jun 12, 2017 10:48 am

I just noticed this infographic on Vanguard's site from a few days ago. At the end, their "takeaway" is "Skilled managers, patience, and low costs can increase the odds of superior performance. Vanguard has all three." Obviously, "can" is a hedge word and they don't really note how much each of those three things generally counts towards odds of improved performance, so while active management can improve odds, how much more likely is it to increase the odds of underperformance against index funds?

Also, in the cited footnote, it starts "Because of expenses, most index funds also underperform their benchmarks", which on one hand seems like a reasonable statement but also seems irrelevant since actively managed funds also have fees.

Thoughts?

EDIT: removed a couple of redundant words
Last edited by Calygos on Mon Jun 12, 2017 11:52 am, edited 2 times in total.

daveydoo
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Re: Vanguard believes in active managment

Post by daveydoo » Mon Jun 12, 2017 10:54 am

Having our cake and eating it, too :happy .

Even steakhouses have a fish entree and salad so there's no reason for anyone to stay away...

Levett
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Re: Vanguard believes in active managment

Post by Levett » Mon Jun 12, 2017 11:09 am

One third of global AUM is in so-called "active." Vanguard does many things well (including keeping costs down in "active").
BH, as we know, is a discussion group.
VG is a company.
Big difference IMHO.

Lev

mhalley
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Re: Vanguard believes in active managment

Post by mhalley » Mon Jun 12, 2017 11:14 am

If Vanguard did not believe in active management, why would they have actively managed funds?

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Calygos
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Re: Vanguard believes in active managment

Post by Calygos » Mon Jun 12, 2017 11:17 am

mhalley wrote:If Vanguard did not believe in active management, why would they have actively managed funds?
To attract and maintain customers who like Vanguard for whatever reasons yet still don't want to manage their investments themselves.

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Re: Vanguard believes in active managment

Post by sschullo » Mon Jun 12, 2017 11:18 am

Levett wrote:One third of global AUM is in so-called "active." Vanguard does many things well (including keeping costs down in "active").
BH, as we know, is a discussion group.
VG is a company.
Big difference IMHO.

Lev
And another difference between the active managers in other companies is that they are not only more expensive, but they are trying to beat the market. To my knowledge, no Vanguard active manager has the "beat the market" philosophy, or they won't last long at VG.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Calygos
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Re: Vanguard believes in active managment

Post by Calygos » Mon Jun 12, 2017 11:20 am

sschullo wrote:
Levett wrote:One third of global AUM is in so-called "active." Vanguard does many things well (including keeping costs down in "active").
BH, as we know, is a discussion group.
VG is a company.
Big difference IMHO.

Lev
And another difference between the active managers in other companies is that they are not only more expensive, but they are trying to beat the market. To my knowledge, no Vanguard active manager has the "beat the market" philosophy, or they won't last long at VG.
Right, so why bother paying managers to actively manage funds when beating the market is the whole point of active management. If you're not trying to beat the market, would you do anything other than index funds? EDIT: That's a sincere question, actually, not rhetorical.

avalpert
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Re: Vanguard believes in active managment

Post by avalpert » Mon Jun 12, 2017 11:21 am

sschullo wrote:
Levett wrote:One third of global AUM is in so-called "active." Vanguard does many things well (including keeping costs down in "active").
BH, as we know, is a discussion group.
VG is a company.
Big difference IMHO.

Lev
And another difference between the active managers in other companies is that they are not only more expensive, but they are trying to beat the market. To my knowledge, no Vanguard active manager has the "beat the market" philosophy, or they won't last long at VG.
Huh? If they aren't trying to 'beat the market' then what exactly are they trying to do and why are they getting paid for it?

BogleAlltheWay
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Re: Vanguard believes in active managment

Post by BogleAlltheWay » Mon Jun 12, 2017 11:47 am

Calygos wrote:I just noticed this infographic on Vanguard's site from a few days ago. At the end, their "takeaway" is "Skilled managers, patience, and low costs can increase the odds of superior performance. Vanguard has all three." Obviously, "can" is a hedge word and they don't really note how much each of those three things generally counts towards odds of improved performance, so while active management can improve odds, how much more likely is it to increase the odds of underperformance against index funds?

Also, in the cited footnote, it starts "Because of expenses, most index funds also underperform their benchmarks", which on one hand seems like a reasonable statement but also seems irrelevant when fees for actively managed funds also have fees.

Thoughts?
In theory, if the total cost of active funds and index funds are the same, the active fund would have a 50/50 shot of outperforming. The issue is that active funds costs are higher so they need to slightly outperform the market just to equal the index fund. The lower costs of Vanguard funds lowers the outperfomance needed to beat the index. If they can find above average managers, they can close the gap and possibly outperform.

avalpert
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Re: Vanguard believes in active managment

Post by avalpert » Mon Jun 12, 2017 11:49 am

BogleAlltheWay wrote:
Calygos wrote:I just noticed this infographic on Vanguard's site from a few days ago. At the end, their "takeaway" is "Skilled managers, patience, and low costs can increase the odds of superior performance. Vanguard has all three." Obviously, "can" is a hedge word and they don't really note how much each of those three things generally counts towards odds of improved performance, so while active management can improve odds, how much more likely is it to increase the odds of underperformance against index funds?

Also, in the cited footnote, it starts "Because of expenses, most index funds also underperform their benchmarks", which on one hand seems like a reasonable statement but also seems irrelevant when fees for actively managed funds also have fees.

Thoughts?
In theory, if the total cost of active funds and index funds are the same, the active fund would have a 50/50 shot of outperforming.
Why would you think the likelihood of outperformance is 50%?

wrongfunds
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Re: Vanguard believes in active managment

Post by wrongfunds » Mon Jun 12, 2017 12:08 pm

Because they will either beat the market or they won't; this is where the 50-50 comes from.

Sorry :-)

avalpert
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Re: Vanguard believes in active managment

Post by avalpert » Mon Jun 12, 2017 12:20 pm

wrongfunds wrote:Because they will either beat the market or they won't; this is where the 50-50 comes from.

Sorry :-)
Just because there are two possibilities doesn't mean they have equal probabilities

sharpjm
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Re: Vanguard believes in active managment

Post by sharpjm » Mon Jun 12, 2017 1:00 pm

avalpert wrote:
wrongfunds wrote:Because they will either beat the market or they won't; this is where the 50-50 comes from.

Sorry :-)
Just because there are two possibilities doesn't mean they have equal probabilities
Exactly.

I will either get struck by lightning, or I won't.

50% Chance! :P

Wakefield1
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Re: Vanguard believes in active managment

Post by Wakefield1 » Mon Jun 12, 2017 1:18 pm

Managed fund (that invests heavily in stocks)-could the objective be to "limit downside risk"or"limit downside risk during bad times" over a relatively short several years as opposed to "beat the market" over an indefinite amount of time?
Was Windsor Fund sort of grandfathered into Vanguard?
Does a managed fund that has lower expenses than other managed funds have a lower chance of underperforming the indexes than expensive funds?

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flamesabers
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Re: Vanguard believes in active managment

Post by flamesabers » Mon Jun 12, 2017 1:31 pm

So long as Vanguard continues to offer a wide selection of index funds, I'm not bothered by Vanguard offering actively managed funds. I see this as more of a reflection of customer demand then anything else.

Levett
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Re: Vanguard believes in active managment

Post by Levett » Mon Jun 12, 2017 1:42 pm

FYI,

There is a link to a VG research paper (dated October 2015) attached to the link of the graphic that was posted.

I'm not sure what the phrase "beat the market" encompasses, but the active funds, like the index funds, have their performance measured against relevant (in Vanguard's eyes) benchmarks.

Lev

Theoretical
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Re: Vanguard believes in active managment

Post by Theoretical » Mon Jun 12, 2017 1:56 pm

Their "active" bond funds have a lot more bonds than the indexes and have less turnover. There's also the benefit of being able to negotiate institutional prices for new issues.

Regarding their stock funds, many of them are quant strategies with moderate turnover at most that merely aren't tied to an index. The qualitative funds also tend to be pretty conservative.

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Kenkat
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Re: Vanguard believes in active managment

Post by Kenkat » Mon Jun 12, 2017 2:24 pm

Vanguard believes low cost and low turnover (called patience above) results in good performance. How exactly the fund is managed is less important to them. The overwhelmingly biggest problem with active funds is their cost; Vanguard active funds have largely eliminated that problem.

goingup
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Re: Vanguard believes in active managment

Post by goingup » Mon Jun 12, 2017 2:24 pm

Sure Vanguard active funds try to beat their benchmark and peers. From the website:

What are actively managed funds?
When a fund is actively managed, a portfolio manager chooses the fund's investments using a combination of in-depth research, market forecasting, experience, and expertise.
While the objective of the fund is to beat both its comparable market benchmark and its peer-group averages, it can also underperform—resulting in losses for the fund and its investors.


Vanguard has over 60 active funds, so I'd say they believe in active management as well as index funds.

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Re: Vanguard believes in active managment

Post by azanon » Mon Jun 12, 2017 2:33 pm

I'd probably be hard for them to not believe in active management, given that the equal-weighted performance of their actives vs. passives is ahead by 0.35% over a 30-yr period, despite the higher fees of the active management. (reference: "The case for Vanguard active management: Solving the low-cost/top-talent paradox?" January 2013, Figure 2 of that paper).

You can get lucky 1 year, 5 years, ...maybe even 10 years in aggregate. But not 30 years in aggregate.

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