Has Vanguard Added Value as an Active Manager?

Passive management was pioneered by Vanguard, and its founder, John Bogle, remains its most outspoken advocate. But the firm also offers actively managed funds. Have they added value relative to its passive counterparts?

I’ll continue my series today on the performance of some of the market’s most prominent actively managed mutual fund families with a look at the actively managed mutual funds offered by Vanguard, the largest fund family with assets under management approaching $3 trillion.

While the huge amount of assets under management alone makes Vanguard an interesting case, there are three other important reasons for examining it. In addition to offering actively managed funds, it’s also the market’s largest provider of index funds. Vanguard’s unique ownership structure (the investors in its funds are its owners) allows them to offer actively managed funds with much lower costs than those offered by its competitors, reducing the hurdle for active managers in their quest for alpha. Third, their actively managed funds tend to exhibit lower turnover than the typical actively managed fund.

The higher costs associated with implementing active strategies are the reason there’s an overwhelming body of evidence demonstrating that active management is a loser’s game. It’s one that is possible to win, but the odds of doing so are so poor that it’s not prudent to try. In fact, academic studies have shown that on a gross basis, before considering their expense ratios and trading costs, active managers do generate alpha.

As is my practice, in order to see how well Vanguard’s actively managed funds have performed for their investors, I will compare the results of its actively managed equity funds both to those of its own index funds and to the passively managed funds of Dimensional Fund Advisors (DFA). (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.)

In addition, DFA funds can be purchased through some 529 and 401(k) plans, but generally they are available only through an advisor. An investor would incur fees from that advisor; those fees vary greatly (in some cases they are very low) and cover the full range of financial planning services provided by the advisor. Also, John Hancock recently introduced a series of ETFs that are managed by DFA (with expense ratios that differ from the DFA funds cited in this article). Those ETFs can be purchased directly by investors. All Vanguard funds can be purchased directly by investors.

To keep the list to a manageable number of funds and to ensure that I examine long-term results through full economic cycles, I’ll analyze the 15-year period ending September 30, 2015. Furthermore, when there is more than one share class of fund available, I will use the lowest-cost shares that were obtainable for the entire period. In the cases where Vanguard has more than one fund in an asset class, the average return of those funds is used in the comparison.

The table below shows the performance data for 14 actively managed funds offered by Vanguard in five domestic asset classes and two international asset classes. Funds are placed in a given asset class based on Morningstar’s style categorization.