Vanguard Active Management versus Vanguard Passive Management

A prominent Vanguard observer claims that certain of Vanguard's actively managed funds have sharply outperformed their passive index counterparts over ten year periods.I just found this out and sorry I didn't find it sooner.

Let's test this. The test will use published returns from Vanguard's website as follows:

Here are the funds:

Index	Vanguard Health Care Index Fund Admiral Shares (VHCIX)
Active	Vanguard Health Care Fund Admiral Shares (VGHAX)
Index	Vanguard Extended Market Index Fund Admiral Shares(VEXAX)
Active	Vanguard Capital Opportunity Fund Admiral Shares(VHCAX)
Index	500 Index Fund Admiral Shares (VFIAX)
Active	Vanguard PRIMECAP Fund Admiral Shares (VPMAX)
Index	Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX)
Active	Vanguard Dividend Growth Fund (VDIGX) CLOSED

Here are the returns as of January 31, 2018:

		1 Year	3 Year	5 Year	10 Year	Since	Inception
Index	VHCIX	28.18%	10.34%	17.84%	12.83%	10.27%	2/5/2004
Active	VGHAX	22.35%	8.12%	17.42%	12.74%	11.00%	11/12/2001
Index	VEXAX	19.52%	11.82%	13.84%	10.35%	8.44%	11/13/2000
Active	VHCAX	33.05%	16.52%	19.85%	12.34%	11.71%	11/12/2001
Index	VFIAX	26.36%	14.62%	15.87%	9.77%	6.43%	11/13/2000
Active	VPMAX	34.27%	16.91%	19.61%	12.35%	11.12%	11/12/2001
Index	VDADX	26.11%	13.39%	—	—	11.80%	12/19/2013
Active	VDIGX	23.65%	12.38%	14.05%	10.12%	8.72%	5/15/1992

Conclusion:

Well, how interesting. While this is an unscientific comparison (we would need to look at the universe of ALL active to index funds to do that), prima facie,Vanguard seems to be able to outdo itself. Three of the four actively managed funds beat their index: VHCAX, VPMAX and VDIGX (although this last one is closed to new investors). Good job, Vanguard!

Feel free to post comments.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors

Now Consider TQQQ

The next logical step after considering the QQQ is to look at the ProShares UltraPro QQQ (TQQQ), that is the 3X leveraged Nasdaq 100 exchange traded fund. Leveraged ETFs get bad press because they supposedly carry hidden risks for small, unsophisticated investors. Brokers charge higher margin requirements for leveraged ETFs, especially 3X ETFs ,which are advertised to deliver three times the daily return of their underlying index-3X up OR down!

Here I will compare the TQQQ to its underlying fund, the QQQ. Two caveats: leveraged funds have higher fees and leveraged funds are marketed only as short term investments, that is, the 3X returns apply only to daily moves in the underlying, not for moves longer than one day.

Do the higher fees embedded in the TQQQ erase their supposed excess returns over the plain vanilla QQQ fund? And, what ARE the long term effects of TQQQ? Yahoo data for TQQQ begins 2/11/2010. Here are the results.

The below are continuously compounded rates of return.

Annualized Returns
as of 11/29/2017
	TQQQ	QQQ
1 month	107.8%	17.9%
3 month	90.2%	-30.4%
6 month	55.9%	-10.0%
1 year	81.9%	14.0%
3 year	32.7%	8.8%
5 year	47.3%	15.4%
Since TQQQ Inception	27.3%	9.8%

* 2010 return is for the period 2/11/2010 to 12/31/2010.
* 2017 return is for the period 1/01/2017 to 11/29/2017.

Risk and Return

	TQQQ	QQQ
3 year mean	32.7%	8.8%
3 year standard deviation	28.8%	8.9%
5 year mean	47.3%	15.4%
5 year standard deviation	30.5%	9.6%

Conclusion

WOW. TQQQ returns are enormous. The 3 and 5 year returns do deliver 3 times the QQQ. The risk is enormous too-in the 28 to 30% range.  The risk adjusted returns, that is, the return delivered per unit of risk is comparable for both funds but the 5 year QQQ return per unit of risk exceeds that of the TQQQ.

The question for most in investors is risk. 9%-10% risk looks reasonable and is found in the QQQs. 29% to 30% found in the TQQQs may be too much to stomach for most investors.

Feel free to post comments.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

American Funds Bold Claim

I'll try to keep this post as short as possible but it seems doubtful. Earlier this year investors were regaled with ads from American Funds claiming: "A Group of Select Equity Funds Has, on Average, Consistently Beaten the Index"

Key words here are "group" and "consistently". I guess this implies that individually and for some periods they don't beat the index. After all kinds of vague charts and unspecified data, the last page of their pdf gets specific.

Seven American Funds are represented as a select group that can beat the index (VFINX).

	Symbol	Inception
Investment Company of America A	AIVSX	1/2/1934
American Mutual Fund A	AMRMX	2/21/1950
Washington Mutual Investors Fund A	AWSHX	7/31/1952
AMCAP Fund A	AMCPX	5/1/1967
The Growth Fund of America A	AGTHX	11/30/1973
Fundamental Investors A	ANCFX	8/1/1978
The New Economy Fund A	ANEFX	12/1/1983

Vanguard S&P 500 Investor Fund

VFINX

8/31/1976

Now lets acknowledge that these are great American mutual funds. The oldest fund here, the Investment Company of America goes back to 1934! Not sure what funds, if any, merged into AIVSX (or the others); but that would have a direct bearing on survivor bias and invest-ability.

I always wondered if any of the old funds have shareholder records going back to 30 years or more. I wonder what those old accounts actually look like today.

To test American's claim I took Yahoo's dataset, and compared the above funds. Caveat: I am comparing NAVs to NAVs, fees NOT included.  Is this fair? Well, both American and Vanguard have different fund classes with differing fees. American Fund A shares have some of the highest loads in the business, but then again, they are legacy funds. So to avoid the load penalty, I am using NAV for comparisons.

And these are the results:

VAMI RETURNS

VAMI Table:

AWSHX   $20,806.88

AGTHX   $22,019.03

ANCFX   $21,394.35

AIVSX    $14,844.63

AMRMX  $13,950.99

AMCPX   $12,828.53

ANEFX   $13,841.07

VFINX   $22,008.00

Only three funds, AWSHX, AGHX and ANCFX compare favorably to VFINX over the long term.  For shorter periods, nearly ALL the listed American Funds do well.

ROLLING RETURNS

Q32017
	VFINX	AWSHX	AGTHX	ANCFX	AIVSX	AMRMX	AMCPX	ANEFX
YTD	13.21%	12.14%	16.54%	14.56%	12.02%	11.34%	14.10%	24.17%
1-Year	16.93%	17.63%	18.11%	18.48%	15.05%	14.41%	15.83%	23.33%
3-Year	10.13%	9.39%	10.94%	10.88%	8.87%	9.09%	9.06%	10.79%
5-Year	13.15%	12.71%	14.10%	13.61%	12.89%	11.81%	13.64%	14.80%
7-Year	13.28%	12.85%	13.10%	12.76%	12.10%	11.71%	13.18%	13.50%
10-Year	7.06%	6.62%	7.09%	7.01%	6.35%	6.84%	7.70%	7.92%
15-Year	9.45%	9.06%	10.27%	10.67%	8.98%	8.97%	9.67%	11.43%
20-Year	6.67%	7.30%	9.05%	8.22%	7.42%	7.35%	8.46%	8.11%
30-Year	8.97%	8.95%	9.06%	9.23%	8.09%	7.80%	7.49%	7.81%

The above are 8 rolling period returns for VFINX and the 7 American Funds in this test. American Funds beat VFINX in 33 of the 63 periods shown.  American Funds beat the index 52% of the time.  Three funds, AGTHX, ANCFX and ANEFX beat 89% of the time periods tested.

CALENDAR YEAR RETURNS

My data spans 31 complete calendar years, 1986 to 2016, and 3Q2017 year-to-date. American Funds overall beat VFINX 40% of the calendar years.  The individual fund beats vary from a spectacular 53% for ANCFX to 44%-34% for the others.

RISK REWARD

3, 5 and 10 year standard deviations of annualized returns have the following results:

3-Year Standard Deviation: 2 of 7 American Funds beat VFINX
5-Year Standard Deviation: 1 of 7 American Fund beats VFINX
10-Year Standard Deviation: 3 of 7 American Funds beat VFINX

CONCLUSION

American Funds NAV generally, over shorter time frames, meet and one beats the returns of VFINX with slightly higher risk. American Funds bold claim is fair.

Disclaimer: This blog is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

VTSAX v VFIAX

Here we go again, this time comparing two Vanguard index mutual funds, the Admiral Class Total Stock Market Fund, VTSAX versus Vanguard's Admiral Class S&P 500 Index Fund, VFIAX.

If you ever studied finance in B-school, or anywhere for that matter, portfolio theory was all about stocks versus bonds versus cash. Well, before the Vanguard Total Stock Market Investor Fund was created on 4/27/1992, nobody could ever buy the entire stock market asset class. Since then, you can. Same with bonds and you always had cash.

Both funds come in Admiral and Investor Class shares as well as institutional classes, as do other Vanguard index funds. We are going to compare the Admiral classes this time. But, fyi, key differences are: Admiral shares have a later inception date of 11/13/2000, a $10,000 minimum investment and 0.04% expense ratio versus much earlier inception dates, $3,000 minimum and 0.15% expense ratio for Investor shares.

Since they are both Vanguard funds we can get the numbers directly from Vanguard. Here they are:

Annualized Returns (reported by Vanguard as of 9/30/2017)

                             VTSAX       VFIAX
Quarter-end             4.54%         4.48%
Year-to-date           13.95%       14.20%
1-Year                    18.63%       18.57%
3-Year                    10.69%       10.78%
5-Year                    14.18%       14.18%
10-Year                    7.69%         7.43%
Since Inception        6.41%         5.81%

Dividend Yield         1.84%         1.93%

3-Year Std. Dev.     10.32%       10.13%
Sharpe Ratio               .84              .90

Top 10 Stocks are the same for both funds.
Total # Stocks          3607             512
Top 10 Stocks*          17%           20.5%
AUM**                   $174.5B     $212.6B

I computed the correlation of daily returns since inception to be an indistinguishable 99.6%.

Ok, so whats the difference between these two funds?

-Not much, with little that matters to investors.
-VTSAX includes the small stocks not in the S&P 500.
-Small stocks are more volatile than large stocks.
-Small stocks have lower dividends than large stocks.
-Small stocks have sometimes higher returns than large stocks.
-All three effects account for the slight differences in fund performance.
-The Total Stock Market Index is arguably more academically correct in that portfolio theory likes to own the whole market and not pick winners and losers.

* Top 10 Stocks as percentage of AUM
**AUM = Assets Under Management

Disclaimer: This blog is not investment advice, is for information purposes only, may be subject to change without notice, and while prepared with care, may be subject to omissions and errors.