22 March 2018
Managing Director of the Vanguard Financial Advisor Services™ Division
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Why We Believe In Active And Passive - No Ifs Or Buts
February 26, 2016
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I’m always a little surprised when people talk about active and passive management as if it’s an either/or question. At Vanguard, we believe the right conjunction¹ is not or. It’s and. Both active and passive strategies have earned spots in your clients’ portfolios. So why do we see so many headlines asking, “Is active management dead?” and its fraternal twin, “Can indexing actually grow too big and fail?” (Vanguard’s answer is a resounding no.)
Coming from the company that popularized indexing, that may sound like heresy, but Vanguard is the third-largest manager of equity mutual funds in the world.² We got our start as an active shop, and today we oversee nearly $1 trillion in actively managed assets, about one-third of our total.
Improving the odds of outperformance
We wouldn’t offer active management if we didn’t believe active managers can succeed. But let’s be frank: It’s difficult. When you discuss with clients the investments you’ll use to help them reach their goals, reframe the conversation. It’s not about active versus passive. It’s about deciding which mix works the best for each client. When active is part of that mix, then it’s about improving the probability of outperformance. Our research has shown again and again that three factors help active funds beat their benchmarks: low cost, top talent, and patience.
Of those three, cost is the most consistent and effective predictor of performance. When it comes to mutual funds and ETFs, you get what you don’t pay for, as this chart shows.
For a more detailed analysis of this chart please see pg. 6 of Keys of improving the odds of active management success.
But can top talent and low costs coexist? Identifying talent is a skill unto itself (read more about our manager-selection process), but once we find it, how do we persuade those managers to work with us? Think about it. Our sheer size allows the managers we select to operate profitably even if fees are relatively small on a percentage basis.
Then there’s patience, which, of course, is essential to any success over the long term. When it comes to active management, the road to outperformance is bumpy, which is why we seek managers who have a competitive advantage that allows them to execute well and consistently over time. Just as we counsel investors to think for the long term, we engage outside managers for the long term—14 years on average. This long-term focus distinguishes us from competitors and is another reason external advisors are eager to work with us.
A performance record you can be proud of too
So you get that we provide superior pricing and, as others will attest, have a rigorous selection and review process, but what’s our track record? We’re in the numbers business, so I’d like to share a few that prove our case.
Over the past ten years, 95% of our actively managed funds have outperformed.³
Our track record has created a lot of value for our shareholders, especially when compared with those who invested in other active funds, as this chart shows.
For a more detailed analysis of this chart please see pg. 12-13 of Keys of improving the odds of active management success.
Consider Vanguard for your active mandates
As an advisor, you have thousands of investment options. Understanding the keys to active success can help you choose well, and counseling clients to remain patient during the inevitable downturns of even the best managers can help you create significant value for their portfolios over time.
As you’re reviewing portfolios, take a close look at Vanguard’s lineup of actively managed funds. Think of us as a buyers’ club that offers access to funds with strong performance records at low cost. We’re always happy to help with your due diligence.
1 I’d like to thank Schoolhouse Rock!’s “Conjunction Junction” for helping me name that part of speech.
2 Morningstar, Inc., as of June 30, 2015.
3 For the ten-year period ended December 31, 2014, 10 of 10 Vanguard money market funds, 40 of 43 bond funds, 14 of 14 balanced funds, and 36 of 38 stock funds, or 100 of 105 Vanguard funds outperformed their Lipper peer-group averages. Results will vary for other time periods. Source: Lipper, a Thomson Reuters Company.Note that the competitive performance data described represent past performance, which is not a guarantee of future results.
All investing is subject to risk, including the possible loss of the money you invest.
For more information about Vanguard funds or Vanguard ETF Shares, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
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