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 Over the last three years, 20 out of Vanguard's 30 actively managed
stock funds outperformed their benchmarks by an average of 1.1
percentage points a year, according to Lipper data. Under lead
manager James Stetler, the $615 million Vanguard Strategic Small Cap
Equity Fund, for example, topped its index by 3.2 percentage points
a year over the same period.
Even in the large-cap stock space, where indexing is supposed to
deliver the greatest value, the $13.8 billion Vanguard Capital
Opportunity Fund has outperformed the S&P 500 index by 6.5
percentage points a year for the last three years. An investor who
put $10,000 into the Vanguard Capital Opportunity fund on Dec 13,
2011, would now have $20,081, according to Morningstar, or $2,884
more than if she had invested in Vanguard's flagship S&P 500 index
fund.
For most firms, such performance would quickly work its way into an
advertisement. Yet Vanguard says little about its actively-managed
line of funds, which receive most of their assets from 401(k) and
other employer-sponsored plans and account for about $940 billion in
assets under management. Vanguard overall has $2.96 trillion under
management.
Some of that likely stems from the influence of firm founder Jack
Bogle, who launched the world's first index fund in 1976 and has
done more than anyone else to make indexing mainstream. Before then,
Vanguard was - like every other fund company - a firm that was
focused solely on active management.
"If the data do not prove that indexing wins, well, the data are
wrong," Bogle wrote in the Little Book of Common Sense Investing
(Wiley), a book published in 2007 that lays out his philosophy that
active management, with its attendant higher fees, can't win. He did
not respond to a request for comment for this story.
Yet the performance of portfolio managers running Vanguard funds
suggests that stock picking is not a fool's errand, as some of
Bogle's most devoted fanatics, known as Bogleheads, make it out to
be.
Vanguard's attempt to walk the line between touting passive
investing while also holding approximately a third of the firm's
overall assets in actively-managed funds could be complicated if its
active funds continue to outperform, said Todd Rosenbluth, director
of mutual fund research at S&P Capital IQ.
But the firm is not worried about losing the loyalty or assets of
the indexing adherents it has picked up in recent years. Stock
picking funds attract "a different type of client" who has time and
interest to research fund managers, said Daniel Newhall, a principal
in the firm's Portfolio Review Group.
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STOCKPICKERS LAG
Overall, Bogle's point about passive investing seems to hold.
For the year to date, 73 percent of actively-managed value funds are
lagging the approximately 8 percent gain in the S&P 500 index, while
94 percent of actively-managed growth funds are underperforming the
benchmark, according to S&P Capital IQ.
Vanguard's outperformance has probably been at least in part due to
what Newhall, the Vanguard principal, calls the "common thread" of
all the firm's funds: low costs.
Vanguard charges an average of 41 cents per $100 invested in its
actively-managed stock funds, compared with an average of $1.25
among all actively-managed stock funds, according to Lipper data.
Those low fees, and strong performance, haven't led to a flood of
assets. For the year to date, Vanguard has brought in $118 billion
into its passive stock funds and exchange traded funds, according to
Lipper data, compared with just $1 billion in new money invested in
its funds run by stock pickers.
The company will likely continue to put its emphasis on passive
investing, which is the strongest part of its brand, Rosenbluth, the
fund analyst, said. Yet the actively managed funds allow it to keep
investors who do want an element of stock picking in their
portfolios from sending money to rivals such as Fidelity Investments
or Charles Schwab Corp, he said.
"They're going to go with the firm they already like and trust," he
said.
(Reporting by David Randall; editing by Linda Stern and John
Pickering)
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