Is an active mutual fund ever appropriate?

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Jesteroftheswamp
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Is an active mutual fund ever appropriate?

Post by Jesteroftheswamp » Wed Jun 05, 2019 9:31 pm

I’ve always steered clear from active funds and have s very nicely balanced portfolio of index funds. Lately I’ve been thinking of taking a little more risk and investing some extra cash into an active fund. I know most Bogleheads forsake these funds, but surely it can be appropriate given ones particular situation. Are there any particular funds you would recommend? Are active funds completely shunned in ALL situations?

retire2022
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Re: Is an active mutual fund ever appropriate?

Post by retire2022 » Wed Jun 05, 2019 9:48 pm

Jesteroftheswamp wrote:
Wed Jun 05, 2019 9:31 pm
I’ve always steered clear from active funds and have s very nicely balanced portfolio of index funds. Lately I’ve been thinking of taking a little more risk and investing some extra cash into an active fund. I know most Bogleheads forsake these funds, but surely it can be appropriate given ones particular situation. Are there any particular funds you would recommend? Are active funds completely shunned in ALL situations?
If you have Flagship services you can get access and limited to $25k per year to any of the closed fund(*)

Vanguard PrimeCap*
https://www.morningstar.com/funds/XNAS/VPMAX/quote.html

Vanguard Capital Opportunity*
https://www.morningstar.com/funds/xnas/vhcax/quote.html

Vanguard Dividend Growth*
https://www.morningstar.com/funds/xnas/vdigx/quote.html

Vanguard Strategic Equity
https://www.morningstar.com/funds/XNAS/VSEQX/quote.html

Vanguard Wellington
https://www.morningstar.com/funds/XNAS/VWENX/quote.html

Vanguard Wellesley
https://www.morningstar.com/funds/xnas/vwiax/quote.html

thread on Primcap/Capital Opportunity

viewtopic.php?f=1&t=269571

I like the day to day changes of active funds, compared to passive funds, admittedly in future decades, regression to the mean, you will be better off with passive fund, I leave it to you to decide.
Last edited by retire2022 on Wed Jun 05, 2019 11:08 pm, edited 2 times in total.

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Taylor Larimore
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Re: Is an active mutual fund ever appropriate?

Post by Taylor Larimore » Wed Jun 05, 2019 9:50 pm

Jesteroftheswamp wrote:
Wed Jun 05, 2019 9:31 pm
I’ve always steered clear from active funds and have s very nicely balanced portfolio of index funds. Lately I’ve been thinking of taking a little more risk and investing some extra cash into an active fund. I know most Bogleheads forsake these funds, but surely it can be appropriate given ones particular situation. Are there any particular funds you would recommend? Are active funds completely shunned in ALL situations?
Jesteroftheswamp:

According to the SPIVA report, "Over the long-term investment horizon, such as 10 or 15 years, 80% or more of active managers across all categories underperformed their respective benchmarks."

Considering the odds, I think you are well-advised to steer clear of all active funds.

https://www.spglobal.com/_assets/docume ... h-2019.pdf

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

LoveVermont
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Re: Is an active mutual fund ever appropriate?

Post by LoveVermont » Wed Jun 05, 2019 10:10 pm

When I started investing, my portfolio was a mess- lots of different holdings with no clear strategy. I eventually consolidated almost entirely to index funds with a balanced stock/bond allocation strategy. However, I did continue to hold a modest position in one active fund which I’ve owned for many years: Dodge and Cox Stock Fund. It’s a large cap value fund which has been out of favor for a few years now, but longer-term (20 years) it’s done a little better than the S&P 500. Will it beat the index long-term going forward? Who knows? But it has some nice attributes for an active fund. Low (for active) ER at 52bp; long history, team management with very little manager turnover; low portfolio turnover; consistent adherence to their style discipline. I’ll continue to hold my position. Best of luck to you!

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Re: Is an active mutual fund ever appropriate?

Post by AlohaJoe » Wed Jun 05, 2019 10:17 pm

Jesteroftheswamp wrote:
Wed Jun 05, 2019 9:31 pm
Are active funds completely shunned in ALL situations?
No, of course not. I'd wager that many -- maybe even most -- Bogleheads hold an active mutual fund.

Vanguard Intermediate-Term Treasury Fund is an active fund. (And so are the long term and short term Treasury funds.) Vanguard Inflation-Protected Securities Fund is an active fund. I think all of the muni bond funds are active. Intermediate-Term Investment Grade is an active fund. High-Yield Corporate is an active fund.

Really, the overwhelming majority of Vanguard bond funds are active. Before 2010, I think Total Bond Market was the only true index bond fund they had. Since 2010 they've started launching some true bond index funds but for a lot of investors they might not have access to them or might have capital gains that make it not cost-effective to switch.

They've fallen out of favor with the rise of ETFs but "tax managed" funds used to be quite popular and those were all actively managed.

Vanguard's Health Care fund is actively managed and relatively popular among a subset of Bogleheads. As mentioned, Wellington & Windsor are actively managed and a vocal minority of Bogleheads are passionate fans of those.

For a very long time, the Pimco Bond run by Bill Gross was held even among Bogleheads.

And nowadays, there are some who favor Vanguard's active factor funds.

I personally would say that active per se isn't a big problem. After all, if a fund is "active" but is only classified that way because they want the trading flexibility to reduce transactions costs, avoid front-running of index changes, & minimise taxes, is that really a bad thing? But telling the average person "avoid active" is a pretty good rule of thumb for 99.99% of funds.

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Dialectical Investor
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Re: Is an active mutual fund ever appropriate?

Post by Dialectical Investor » Wed Jun 05, 2019 10:30 pm

Jesteroftheswamp wrote:
Wed Jun 05, 2019 9:31 pm

Lately I’ve been thinking of taking a little more risk and investing some extra cash into an active fund.
Of all the ways I could take on more risk, this is one of the worst, to me. Betting on a person's or management team's capabilities when you don't have the capabilities to make a full assessment is not appealing. An exception would be for funds highly constrained by investment objective or quantitative approach, and where potential damage is somewhat limited. At least I would have a better idea of what I should be getting and if they are straying from the path. You could argue some of the largest stock mutual funds could meet this criteria as well if they are closet index funds, but then, what's the point?

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Kenkat
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Re: Is an active mutual fund ever appropriate?

Post by Kenkat » Wed Jun 05, 2019 10:43 pm

If the index fund is low cost and low turnover and meets the particular investment objective you are targeting, it could be an appropriate choice.

HEDGEFUNDIE
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Re: Is an active mutual fund ever appropriate?

Post by HEDGEFUNDIE » Thu Jun 06, 2019 12:53 am

All the actively managed funds I currently hold:

Vanguard Global Minimum Volatility
Vanguard Wellesley
Royce Opportunity
Fidelity Contrafund
PRIMECAP Odyssey Aggressive Growth
Matthews China Dividend
PIMCO Income
Vanguard Emerging Markets Bond

ohai
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Re: Is an active mutual fund ever appropriate?

Post by ohai » Thu Jun 06, 2019 1:42 am

Usually, active funds are not worth it. This is a statistical fact.

With that being said, one of my favorite holdings at the moment is an active fund, ticker NZF, which is probably 3% or 4% of my portfolio.

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Nate79
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Re: Is an active mutual fund ever appropriate?

Post by Nate79 » Thu Jun 06, 2019 8:08 am

If you read the many many many BH threads on "what active fund do you hold?" you will see that BH are not against active funds. Most hold them for a variety of reasons though increased risk is doubtful to be one of them.

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Re: Is an active mutual fund ever appropriate?

Post by HEDGEFUNDIE » Thu Jun 06, 2019 8:29 am

ohai wrote:
Thu Jun 06, 2019 1:42 am
Usually, active funds are not worth it. This is a statistical fact.

With that being said, one of my favorite holdings at the moment is an active fund, ticker NZF, which is probably 3% or 4% of my portfolio.
A leveraged muni junk bond fund? Wow and I thought I was crazy.

Nowizard
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Re: Is an active mutual fund ever appropriate?

Post by Nowizard » Thu Jun 06, 2019 8:34 am

Some of us feel that diversification can also apply to choosing some active funds. For example, some may have their entire portfolio in a combination of Wellington and Wellesley. There would not be much support for that approach here, however.

Tim

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Re: Is an active mutual fund ever appropriate?

Post by jhfenton » Thu Jun 06, 2019 8:42 am

HEDGEFUNDIE wrote:
Thu Jun 06, 2019 12:53 am
Vanguard Emerging Markets Bond
I also own VEGBX/Vanguard Emerging Markets Bond at 45 bp. For an asset class like EM bonds, I'm willing to pay the extra 15 bp (previously 13 bp) compared to an index fund like VWOB/Vanguard Emerging Markets Government Bond Index ETF at 30 bp (32 bp until recently). Global market cap weighting just doesn't seem to me to make sense with EM bonds. And while past performance is no guarantee, as they say, I bought VEGBX at the inception (12/6/17) and it has handily beaten VWOB. (Based on M* data, $10K has grown to $11,002.66 in VEGBX vs $10,449.68 in VWOB.)

I own VOHIX/Vanguard Ohio Long-Term Tax Exempt at 13 bp. There is no competitive index fund in existence.

I own VFMFX/Vanguard US Multifactor Admiral at 18 bp and VFVA/Vanguard US Value Factor ETF at 13 bp. They are both classified as active by Vanguard.

For me, the decision is not so much about active vs passive as high-cost vs low-cost.

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Re: Is an active mutual fund ever appropriate?

Post by ohai » Thu Jun 06, 2019 8:52 am

HEDGEFUNDIE wrote:
Thu Jun 06, 2019 8:29 am
ohai wrote:
Thu Jun 06, 2019 1:42 am
Usually, active funds are not worth it. This is a statistical fact.

With that being said, one of my favorite holdings at the moment is an active fund, ticker NZF, which is probably 3% or 4% of my portfolio.
A leveraged muni junk bond fund? Wow and I thought I was crazy.
It's only crazy if it blows up!!

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Re: Is an active mutual fund ever appropriate?

Post by dru808 » Thu Jun 06, 2019 11:52 am

I don’t mind what I call (conservative active funds) or I guess you could just say I don’t mind balanced active funds from the big companies. Like Wellington, star, Wellesley, d&c balanced, fidelity balanced, t Rowe capital appreciation etc...

I’m 50/50 in my ira. Vanguard LifeStrategy moderate/vanguard star. Guess which one has been whipping who? Star beating on lsmg. Still sticking with the index portion for the rest of my life, even if it gets whupped on it just kinda ”feels” safer!? Idk

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Re: Is an active mutual fund ever appropriate?

Post by Fallible » Thu Jun 06, 2019 12:07 pm

Jesteroftheswamp wrote:
Wed Jun 05, 2019 9:31 pm
I’ve always steered clear from active funds and have s very nicely balanced portfolio of index funds. Lately I’ve been thinking of taking a little more risk and investing some extra cash into an active fund. I know most Bogleheads forsake these funds, but surely it can be appropriate given ones particular situation. Are there any particular funds you would recommend? Are active funds completely shunned in ALL situations?
More information would be helpful about your "particular situation," such as:

-What active fund(s) are you considering?
-What do you mean by "extra" cash?
-How much more risk do you have the ability, willingness, and need to take?
"John Bogle has changed a basic industry in the optimal direction. Of very few can this be said." ~Paul A. Samuelson

fennewaldaj
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Re: Is an active mutual fund ever appropriate?

Post by fennewaldaj » Thu Jun 06, 2019 1:36 pm

jhfenton wrote:
Thu Jun 06, 2019 8:42 am
HEDGEFUNDIE wrote:
Thu Jun 06, 2019 12:53 am
Vanguard Emerging Markets Bond
I also own VEGBX/Vanguard Emerging Markets Bond at 45 bp. For an asset class like EM bonds, I'm willing to pay the extra 15 bp (previously 13 bp) compared to an index fund like VWOB/Vanguard Emerging Markets Government Bond Index ETF at 30 bp (32 bp until recently). Global market cap weighting just doesn't seem to me to make sense with EM bonds. And while past performance is no guarantee, as they say, I bought VEGBX at the inception (12/6/17) and it has handily beaten VWOB. (Based on M* data, $10K has grown to $11,002.66 in VEGBX vs $10,449.68 in VWOB.)

I own VOHIX/Vanguard Ohio Long-Term Tax Exempt at 13 bp. There is no competitive index fund in existence.

I own VFMFX/Vanguard US Multifactor Admiral at 18 bp and VFVA/Vanguard US Value Factor ETF at 13 bp. They are both classified as active by Vanguard.

For me, the decision is not so much about active vs passive as high-cost vs low-cost.
I too elected to go for the vanguard active fund EM bond fund over the passive one. I do have a local currency bond allocation too. That one I used an index EMLC (van eyke vectors local EM bond) because there was not a cheap active fund.

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Re: Is an active mutual fund ever appropriate?

Post by alex_686 » Thu Jun 06, 2019 1:48 pm

There are 2 reasons to own active funds.

The first is you think you have identified a superior portfolio manager. We know the issues here.

The second is that there are exploitable issues with the index. This is more common than you expect. Most of the issues center around liquidity. Investable indexes have to be liquid enough so that fund managers can run large amounts of money into and out of the market without affecting the market, so the less liquid stuff gets dropped.

There is real money to be made here. Junk bonds is an easy one. On-The-Run/Off-The-Run Treasuries is another. Maybe the small cap/micro cap universe. I used to think EM fell into this category but I am revisiting this assumption, and know think this is only true for the small cap EM universe.

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Re: Is an active mutual fund ever appropriate?

Post by grabiner » Thu Jun 06, 2019 8:51 pm

Jesteroftheswamp wrote:
Wed Jun 05, 2019 9:31 pm
I’ve always steered clear from active funds and have s very nicely balanced portfolio of index funds. Lately I’ve been thinking of taking a little more risk and investing some extra cash into an active fund.
I don't recommend doing this just to take the risk. If there is a low-cost active fund which is the best way to meet your investment needs, then it is reasonable to hold.

I am all-index now, but I have held several active funds which were correct at the time (and some mistakes which were tax-efficient):

I held Vanguard Growth and Income as the first fund in my Roth IRA. At that time, Vanguard charged a $10 fee on index funds under $10,000, which was an extra 0.5% on my $2000 opening balance; the active fund was cheaper. I switched to an index when I got the IRA over $5000 two years later.

I held Vanguard Windsor in a 403(b) because it gave better value exposure than Value Index at the time.

I held Vanguard International Explorer in my Roth IRA because there was no index at the time, and continued to hold it when it was less expensive than the available index (the ETF GWX). I switched to Vanguard's lower-cost index when it became available.
Wiki David Grabiner

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Re: Is an active mutual fund ever appropriate?

Post by Van Down By Da River » Fri Jun 07, 2019 9:53 am

I have 90% percent of my money in index funds, however, I have never been a big fan of putting all of my eggs in one basket and am beginning to add mutual funds to the mix with the plan to make it an even 50/50 eventually

I know that indexes have won the active/passive contest for a while now, but who knows, they always say that past performance doesn't guarantee future results? I figure, if active or passive wins over my the rest of my lifetime, I will split the difference and end up somewhere in the middle

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Re: Is an active mutual fund ever appropriate?

Post by teacher » Fri Jun 07, 2019 11:03 am

The lion's share of our equities is in Vanguard Total Stock Market (9.62% ave annual return since inception in 1992). But, with our beneficiaries in mind, we continue to hold two active funds; Vanguard Health Care since the mid '80s (16.12% ave annual return since inception in 1984) and Vanguard Capital Opportunity, since the mid 90's (12.37% ave annual return since inception in 1995). After 2.5 - 3.5 decades, we will continue to hold them in the portfolio, at least short-term. Long-term future risks seem greater in both funds, so we are holding them with eye askance. We would not own these funds if we depended on them, but since they are earmarked for long-term investing in terms of a legacy, we think they are appropriate.

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Re: Is an active mutual fund ever appropriate?

Post by KyleAAA » Fri Jun 07, 2019 11:15 am

The expensive ones, no. But for example, Vanguard Wellington Admiral shares only cost 0.17%. That might be worth it for a lot of people if the asset allocation fits your needs. The advantage of index funds comes primarily from their lower costs, not some magical property of following an index. If an active fund can come close to the cost of an index fund then sure, it could make sense to buy it. Taxes due to turnover could be a concern, but then you'd just buy in an IRA.

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