Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
fortfun
Posts: 2017
Joined: Tue Apr 19, 2016 7:31 pm

Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by fortfun » Thu May 09, 2019 10:05 pm

https://www.financial-planning.com/opin ... o-advisors

Are Bogleheads still recommending index due to "past performance doesn't indicate future success?"

wootwoot
Posts: 324
Joined: Tue Jan 27, 2009 7:37 pm

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by wootwoot » Thu May 09, 2019 10:17 pm

Why cherry pick 10 years? Why not 20, 30, 50, etc?

heyyou
Posts: 3441
Joined: Tue Feb 20, 2007 4:58 pm

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by heyyou » Thu May 09, 2019 11:20 pm

A datum: My index fund returns since 1980 were adequate for retiring at 55 in 2005, with emphasis on "adequate" plus significant saving.
When I chased performance, I didn't do as well, so you go ahead and follow your perceptions of risk and return. There will always be exceptions since economics has such exposure to our emotions, and there are few or none economic laws like gravity which is immutable. Consider the remaining length of your investing horizon while searching for what will outperform index investing.

Half and half of index/VG active funds, might be an allocation for you.

User avatar
JoMoney
Posts: 7016
Joined: Tue Jul 23, 2013 5:31 am

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by JoMoney » Thu May 09, 2019 11:47 pm

fortfun wrote:
Thu May 09, 2019 10:05 pm
Active Vanguard Funds besting index by 90 basis points (past 10 yrs)
:confused :confused :confused
https://investor.vanguard.com/mutual-fu ... nd-returns

500 Index Admiral Shares 15.30%

Diversified Equity 15.01%
Dividend Growth 14.43%
Equity Income 14.78%
Growth and Income 15.14%
Windsor 13.49%
Windsor II 13.38%
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

UpperNwGuy
Posts: 2058
Joined: Sun Oct 08, 2017 7:16 pm

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by UpperNwGuy » Fri May 10, 2019 2:40 am

fortfun wrote:
Thu May 09, 2019 10:05 pm
https://www.financial-planning.com/opin ... o-advisors

Are Bogleheads still recommending index due to "past performance doesn't indicate future success?"
Yes, we are.

User avatar
Sheepdog
Posts: 5298
Joined: Tue Feb 27, 2007 3:05 pm
Location: Indiana, retired 1998 at age 65

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by Sheepdog » Fri May 10, 2019 3:08 am

It's one thing finding the best active funds from the hundreds out there for the last 10 years, but it's another thing finding the best active funds for the next 10 years. The last 10 years for an active fund does not necessarily equate to the next 10 years. Index funds are reliable.
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

student
Posts: 3270
Joined: Fri Apr 03, 2015 6:58 am

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by student » Fri May 10, 2019 5:10 am

I believe the main problem with active funds is the cost. Since Vanguard's active funds have low cost, I expect its performance to be similar to its index funds. I have decided it is better for me to go with index funds.

User avatar
oldcomputerguy
Moderator
Posts: 4724
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods in East Tennessee

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by oldcomputerguy » Fri May 10, 2019 5:17 am

Which funds, and which index? It's important to compare apples to apples, and not cloud the issue with a mismatch between asset classes.

ETA: From the article (boldface added by me):
“We believe in active management, we just don’t believe in high-cost active management,” he said, noting that the firm’s active funds have bested their index benchmarks by 90 basis points a year over the past 10 years (although likely not on an after-tax basis, since active investing is less tax-efficient than passive index funds).
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

User avatar
dwickenh
Posts: 1658
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by dwickenh » Fri May 10, 2019 7:53 am

oldcomputerguy wrote:
Fri May 10, 2019 5:17 am
Which funds, and which index? It's important to compare apples to apples, and not cloud the issue with a mismatch between asset classes.

ETA: From the article (boldface added by me):
“We believe in active management, we just don’t believe in high-cost active management,” he said, noting that the firm’s active funds have bested their index benchmarks by 90 basis points a year over the past 10 years (although likely not on an after-tax basis, since active investing is less tax-efficient than passive index funds).
Oh you mean we're supposed to consider taxes in investing?? :twisted:

Good catch!!
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

User avatar
Kenkat
Posts: 4910
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by Kenkat » Fri May 10, 2019 8:40 am

JoMoney wrote:
Thu May 09, 2019 11:47 pm
fortfun wrote:
Thu May 09, 2019 10:05 pm
Active Vanguard Funds besting index by 90 basis points (past 10 yrs)
:confused :confused :confused
https://investor.vanguard.com/mutual-fu ... nd-returns

500 Index Admiral Shares 15.30%

Diversified Equity 15.01%
Dividend Growth 14.43%
Equity Income 14.78%
Growth and Income 15.14%
Windsor 13.49%
Windsor II 13.38%
Is there a reason you left off the ones that did best the index? Primecap and US Growth? Plus that’s just one category of funds.

That said, 90 basis points sound high to me - and that is coming from someone who uses some Vanguard active in tax deferred accounts. I would be interested in seeing the data backing up the claim.

Given the low cost nature of Vanguard funds, it doesn’t matter all that much whether they are indexed or active. Expected returns would be similar since cost and turnover is the overwhelming determinant of performance.

User avatar
jeffyscott
Posts: 7944
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by jeffyscott » Fri May 10, 2019 8:55 am

dwickenh wrote:
Fri May 10, 2019 7:53 am
oldcomputerguy wrote:
Fri May 10, 2019 5:17 am
Which funds, and which index? It's important to compare apples to apples, and not cloud the issue with a mismatch between asset classes.

ETA: From the article (boldface added by me):
“We believe in active management, we just don’t believe in high-cost active management,” he said, noting that the firm’s active funds have bested their index benchmarks by 90 basis points a year over the past 10 years (although likely not on an after-tax basis, since active investing is less tax-efficient than passive index funds).
Oh you mean we're supposed to consider taxes in investing?? :twisted:

Good catch!!
In a taxable account, but there is certainly a lot of money in retirement accounts, where taxes are not an issue (over 90% in my case).

Most active funds charge too much. Vanguard's don't, so their fund managers need only add a small amount of value in order to beat the comparable index fund. They are a fine choice in tax deferred and Roth accounts.

Many index funds also charge too much (not Vanguard's, of course).
Time is your friend; impulse is your enemy. - John C. Bogle

User avatar
jeffyscott
Posts: 7944
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by jeffyscott » Fri May 10, 2019 9:07 am

JoMoney wrote:
Thu May 09, 2019 11:47 pm
500 Index Admiral Shares 15.30%

Diversified Equity 15.01%
Dividend Growth 14.43%
Equity Income 14.78%
Growth and Income 15.14%
Windsor 13.49%
Windsor II 13.38%
The S&P 500 is not the comparable index for all of those.

For example Dividend Growth should be compared to Dividend Appreciation Index fund, which it has beaten by about 0.5% over the past 10 years as of 4/30/19 (would be a bit less if Admiral shares had 10 year record, but the managed fund would still be ahead by maybe 40-45 bp).
Time is your friend; impulse is your enemy. - John C. Bogle

User avatar
dwickenh
Posts: 1658
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by dwickenh » Fri May 10, 2019 9:10 am

jeffyscott wrote:
Fri May 10, 2019 8:55 am
dwickenh wrote:
Fri May 10, 2019 7:53 am
oldcomputerguy wrote:
Fri May 10, 2019 5:17 am
Which funds, and which index? It's important to compare apples to apples, and not cloud the issue with a mismatch between asset classes.

ETA: From the article (boldface added by me):
“We believe in active management, we just don’t believe in high-cost active management,” he said, noting that the firm’s active funds have bested their index benchmarks by 90 basis points a year over the past 10 years (although likely not on an after-tax basis, since active investing is less tax-efficient than passive index funds).
Oh you mean we're supposed to consider taxes in investing?? :twisted:

Good catch!!
In a taxable account, but there is certainly a lot of money in retirement accounts, where taxes are not an issue (over 90% in my case).

Most active funds charge too much. Vanguard's don't, so their fund managers need only add a small amount of value in order to beat the comparable index fund. They are a fine choice in tax deferred and Roth accounts.

Many index funds also charge too much (not Vanguard's, of course).
I agree with your tax deferred premise on taxes and I have a Vanguard Actively Managed fund in my IRA.

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

User avatar
Topic Author
fortfun
Posts: 2017
Joined: Tue Apr 19, 2016 7:31 pm

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by fortfun » Fri May 10, 2019 9:20 am

Thanks for the thoughtful responses so far! Much appreciated. The article caught my attention because I had a 403b salesman in my office yesterday pedaling active managed funds. Of course, I told him he couldn't cherry pick the best performers and that in the long run, low fee index funds will beat the majority of actively managed funds. Last night, I happened upon this article and wanted to double check with the experts--of which, I'm not one...

dkturner
Posts: 1492
Joined: Sun Feb 25, 2007 7:58 pm

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by dkturner » Fri May 10, 2019 10:09 am

wootwoot wrote:
Thu May 09, 2019 10:17 pm
Why cherry pick 10 years? Why not 20, 30, 50, etc?
Since you brought the subject up, can you set us straight?

User avatar
grabiner
Advisory Board
Posts: 24404
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by grabiner » Fri May 10, 2019 10:26 pm

Which funds are being used in the comparison? I found only 7 of 21 stock funds which beat their index over 10 years (8 of 21 if you require Investor shares of Small-Cap Growth Index, rather than splicing Investor and Admiral shares from the Admiral creation date). The stock total is close to break-even, as the two biggest differences are Global Equity and International Growth which are well above Total World Stock and Total International Stock.

It's the bond funds, and the bonds in balanced funds which have beaten the indexes, but these are unfair comparisons. Short-Term, Intermediate-Term, and Long-Term Investment-Grade, which are almost all corporate bonds, have beaten the indexes which are half government bonds. (The corporate indexes don't have a ten-year history.) Wellington holds longer-term bonds than Balanced Index, and longer-term bonds and less international than LifeStrategy Moderate Growth; similarly with Wellesly and LifeStrategy Conservative Growth.
Wiki David Grabiner

zero sum guy
Posts: 43
Joined: Sun Apr 22, 2007 4:03 pm

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by zero sum guy » Fri May 10, 2019 10:38 pm

Frankly I went to the link and got an advertisement for a financial advisor.
I would rather take the investing advice from Bernie Madoff when he gets out of jail in one hundred years.
I will stay with the Vanguard 500 Admiral shares.
No hype, no fuss, just the best investment results.
These flash in the pan advisors can't guarantee future results. They can guarantee their sales commission and high expense ratios.

User avatar
jeffyscott
Posts: 7944
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by jeffyscott » Sat May 11, 2019 6:48 am

grabiner wrote:
Fri May 10, 2019 10:26 pm
Which funds are being used in the comparison? I found only 7 of 21 stock funds which beat their index over 10 years (8 of 21 if you require Investor shares of Small-Cap Growth Index, rather than splicing Investor and Admiral shares from the Admiral creation date). The stock total is close to break-even, as the two biggest differences are Global Equity and International Growth which are well above Total World Stock and Total International Stock.

It's the bond funds, and the bonds in balanced funds which have beaten the indexes, but these are unfair comparisons. Short-Term, Intermediate-Term, and Long-Term Investment-Grade, which are almost all corporate bonds, have beaten the indexes which are half government bonds. (The corporate indexes don't have a ten-year history.) Wellington holds longer-term bonds than Balanced Index, and longer-term bonds and less international than LifeStrategy Moderate Growth; similarly with Wellesly and LifeStrategy Conservative Growth.
It seemed clear to me what Vanguard’s CEO, Tim Buckley is comparing. The link says he noted that the firm’s active funds have bested their index benchmarks by 90 basis points a year over the past 10 years.

One way to find this is to go to performance page for each fund, such as this for intermediate investment grade: https://investor.vanguard.com/mutual-fu ... ance/vfidx

It's benchmark is not the generic bond index fund, it is BloomBarc US 5-10 Year Credit Index, which it has actually not beaten over the past 10 years.

Wellington also has not beaten it's benchmark, which (since 2000) is 65% S&P 500 Index and 35% Bloomberg Barclays U.S. Credit A or Better Bond Index.

Wellesley has beaten it's benchmark which as of August 1, 2007, is the FTSE High Dividend Yield Index for stocks and Bloomberg Barclays U.S. Credit A for bonds.

It looks like there are 59 actively managed Vanguard funds with 10 year records. I assume that if you took the difference between each of these and their benchmarks and then averaged the difference that this would come out to 90 bp/year (if Buckley's claim is true). Of course, it's possible he meant something else or the comparison was over some other time period, such as the 10 years ended Dec. 31, 2018.
Time is your friend; impulse is your enemy. - John C. Bogle

User avatar
JoMoney
Posts: 7016
Joined: Tue Jul 23, 2013 5:31 am

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by JoMoney » Sat May 11, 2019 9:06 am

Kenkat wrote:
Fri May 10, 2019 8:40 am
JoMoney wrote:
Thu May 09, 2019 11:47 pm
fortfun wrote:
Thu May 09, 2019 10:05 pm
Active Vanguard Funds besting index by 90 basis points (past 10 yrs)
:confused :confused :confused
https://investor.vanguard.com/mutual-fu ... nd-returns

500 Index Admiral Shares 15.30%

Diversified Equity 15.01%
Dividend Growth 14.43%
Equity Income 14.78%
Growth and Income 15.14%
Windsor 13.49%
Windsor II 13.38%
Is there a reason you left off the ones that did best the index? Primecap and US Growth? Plus that’s just one category of funds.

That said, 90 basis points sound high to me - and that is coming from someone who uses some Vanguard active in tax deferred accounts. I would be interested in seeing the data backing up the claim.

Given the low cost nature of Vanguard funds, it doesn’t matter all that much whether they are indexed or active. Expected returns would be similar since cost and turnover is the overwhelming determinant of performance.
Because those funds had higher returns, so there's not really a question there.
The statement was made without giving any context to the many active Vanguard funds that lose to the index. I haven't surveyed all the active funds, but in the context U.S. Large Cap the majority were not "besting" the index past 10 years.
We can get into other details as well, like proper benchmarking, The US Growth fund didn't "best" Vanguard's Growth Index fund, Primecap didn't best a 50/50 mix of the Info-Tech and Healthcare Sector indices (Primecap is an odd duck, my example is not a great benchmark, but does match the funds style and stated concentration cautions)

I would agree that for the most part Vanguard offers low-fee reasonably conservative active funds, and are likely to be good funds regardless. The advantages I see to index funds at Vanguard is lower cost, style consistency, and no manager risk. Active funds should be able to average the returns of the market too (if they're reasonably diversified)... they just cost more.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
FIREchief
Posts: 3055
Joined: Fri Aug 19, 2016 6:40 pm

Re: Active Vanguard Funds besting index by 90 basis points (past 10 yrs)

Post by FIREchief » Sat May 11, 2019 1:50 pm

Is this one of those datasets where they conveniently forget to include dividends? (like the annuity salesmen)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Post Reply