Vanguard's CEO - Not All Active Management Is Dead: Financial Advisors' Daily Digest

by: SA For FAs


Wanted: Advisors who can help with actively managed Vanguard funds.

Jim Sloan: At what yield do bonds begin to make sense again?

T-Rail Investor: Why would a skilled investor reveal his strategy?

Two new articles from Vanguard are noteworthy because they run counter to the firm's image as home to do-it-yourself index investors. First a clarification: Vanguard is home to do-it-yourself index investors, so the image is well-founded. And a second clarification: It's also provided a home for advised investors and active fund investors, so the two articles I'm quoting below are not news - just a reminder that Vanguard didn't become the largest mutual fund company, managing assets in the trillions, by catering to just a slice of the market. It achieved its preeminence by providing genuine value that gave it credibility in diverse market segments.

In the first of these articles, Vanguard of all firms pronounces active management as not dead. But for those active managers breathing a sigh of relief, or just glad that they're breathing at all, the prescription its CEO Bill McNabb offers for a long healthy life is enough to knock many of them out again. He argues that these funds must dramatically lower their costs, offering the following rationale:

These days, it's not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses-not even the high end of the range-will likely find it extraordinarily difficult to overcome the index fund's head start."

So it's possible to beat the market - but to have a fighting chance, you need to get a lower-weight jockey on that horse.

And how might an active manager find a market-beating strategy? That's the focus of a second article touting the advantages of factor investing. The article discusses factors such as style (e.g., value investing) or size (e.g., small-cap investing), but I found this snippet of greatest interest:

Factors tend to be cyclical, and they can produce long periods of underperformance. That's where advisors can help clients...Advisors can act as behavioral coaches when strategies require a level of patience over a period of time that could stretch on for years."

Vanguard has long planted its flag in the advisor camp - though this somehow is not well known. That is why the firm has written and many times updated its study on "advisor's alpha," suggesting that advisors can improve their investment performance with the behavioral coaching help of a professional, among other advisor-related "factors." That approach won't suit everyone, of course, but it's a tad amusing to consider what could be a new trend - clients looking for an advisor's guidance using Vanguard active funds.

Your thoughts, as always, are welcome in our comments section. In the meantime, here are today's links: