Advertisement
investing

5 Index-Beating Vanguard Funds

The firm known for its index offerings has some great actively managed funds.

Vanguard has become synonymous with index investing, and its assets have swelled to more than $4 trillion as it has grown into the largest fund family in the world. But here’s something you may not know: About 30% of that money isn’t invested in index funds; it’s in actively managed funds. What’s more, many of those funds have long records of beating their indexes.

Advertisement - Article continues below

Dan Wiener, editor of The Independent Adviser for Vanguard Investors newsletter, found that 78% of Vanguard’s 18 domestic, nonsector, actively managed stock and balanced funds beat Standard & Poor’s 500-stock index over the past 15 years through last year. Fourteen funds outperformed the index, while just four lagged.

How do they do it? The most important strategy Vanguard employs is to charge low fees. Low fees have proved to be a remarkably accurate indicator of funds’ success in topping their benchmarks. Because Vanguard’s fund shareholders own the company, it doesn’t need to turn a profit. Thus, it can charge lower fees than the competition.

“The argument against actively managed funds comes down to cost,” Wiener says. “There are lots of good managers, but they are hampered by huge operating-cost headwinds.” The average U.S. stock mutual fund charges 1.14% annually; Vanguard’s actively managed stock funds charge a weighted average of 0.29% for the Admiral shares.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

But that’s not all Vanguard has going for it. Almost all of the best active funds Vanguard offers are run by outside managers. Most mutual fund firms hire employees to manage their funds. If the managers don’t produce, firing them can be difficult and damaging to company morale. Not so with outside advisers: Vanguard can pick the best, and if they stumble badly, it’s comparatively easy and painless to replace them.

Yet Wellington Management, one of Vanguard’s best outside firms, has worked with Vanguard since Jack Bogle founded the firm in 1975. In 1984, Bogle hired Primecap, which also runs several successful Vanguard funds. That tells me that the industry’s indexing pioneer is also a pretty fair judge of stock pickers.

A team of highly experienced people at Vanguard works full-time hiring, monitoring and, occasionally, firing the outside firms that run Vanguard funds. These overseers are not perfect, but overall, they’ve done a good job.

Advertisement - Article continues below

Most of Vanguard’s best actively managed funds are closed to new investors. Below are the three that are still open, as well as two that are near clones of closed Vanguard funds.

Vanguard Health Care (VGHCX) has long been my favorite sector fund. Manager Jean Hynes started working at Wellington Management right after graduating from Wellesley College. She has worked on the fund for more than two decades, becoming comanager in 2008 and sole manager in 2012, when longtime manager Ed Owens retired.

The health care sector has grown for decades at a faster rate than the overall economy, and I see little reason for that not to continue, no matter what happens in Washington. Aging baby boomers are using more health care, burgeoning middle classes in emerging markets are demanding health care, and innovative new treatments for diseases are being developed at a rapid pace.

Advertisement
Advertisement - Article continues below

The fund returned an annualized 10.9% over the past 15 years—an average of 3.1 percentage points per year better than the S&P 500. The Investor share class costs 0.37% annually; the Admiral shares (VGHAX) have a $50,000 minimum investment but charge less, 0.32%. Admiral shares are often available with lower minimums through online brokers. (All returns in this article are through May 12, unless otherwise noted.)

Advertisement - Article continues below

Vanguard International Growth (VWIGX) charges 0.46% annually for the Investor shares and 0.33% for the Admiral shares (VWILX). Compare that with 1.21% for the average diversified international stock fund. Over the past 15 years, the Investor shares of the Vanguard fund have topped the MSCI All-Country ex-USA index by an average of nine-tenths of a percentage point per year—more than the six-tenths of a point difference in expense ratios between the Vanguard fund and its average competitor. Two first-class foreign stock firms run International Growth. Baillie Gifford, based in Scotland, manages 60% of assets, and London-based Schroders manages the other 40%. These are huge firms with extensive experience and analysts all over the world. The managers aren’t afraid of volatile emerging markets, where the fund currently has 20% of assets.

Since its inception in late 1984, Vanguard Primecap returned an annualized 13.6%—an average of 2.5 percentage points per year better than the S&P. The fund, which charges 0.33% annually for its Admiral shares, is closed to new investors. But Primecap Odyssey Growth (POGRX), a near clone of Vanguard Primecap run by Primecap managers, is still open. It charges 0.65%. That’s not Vanguard-cheap, but it’s still much less than the average U.S. stock fund charges. Both funds have about 60% of assets in technology and health care stocks, with roughly 30% in each sector for Primecap Odyssey Growth.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

Vanguard Primecap Core (VPCCX) is a more conservative Primecap fund, which is also closed to new investors. Primecap Odyssey Stock (POSKX) is a near clone with an expense ratio of 0.67%. Odyssey Stock is less volatile than Odyssey Growth and tends to hold up better in bear markets. You’ll find more big tech and drug stocks in the former; the latter has more start-up tech and biotech stocks. Either fund gives you the patient, contrarian growth strategy that has made Primecap so successful for more than three decades.

Wellington Fund was launched in 1928, almost a half century before Bogle founded Vanguard and brought the fund under the Vanguard umbrella. It’s an old-fashioned balanced fund: Roughly two-thirds of assets are in stocks, and the remainder is in bonds. Stock manager Edward Bousa looks for undervalued, dividend-paying, large companies with competitive advantages over their peers. His conservative approach, along with the bond stake, means the fund tends to hold up relatively well in bear markets. Three bond managers stick to high-quality bonds with, on average, intermediate maturities.

Over the past 15 years, the fund returned an annualized 7.9%—an average of two-tenths a percentage point per year more than the S&P. Yet it was 34% less volatile than the S&P during that stretch. Given how low interest rates are today and how high bond prices are, I don’t expect returns to be nearly as strong relative to the S&P going forward. But Wellington should continue to be a relatively low-risk fund suitable for conservative investors. Expenses for the Investor shares (VWELX) are 0.25%. The Admiral shares (VWENX), with the $50,000 minimum, cost just 0.16% annually. Wellington is available only if you buy it directly from Vanguard.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

Advertisement

Most Popular

2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Chiropractor Trying to Get Business the Wrong Way – Illegally
careers

Chiropractor Trying to Get Business the Wrong Way – Illegally

A new chiropractor’s fledgling business plan to attract patients may sound reasonable at first look, but it’s actually against the law, and the same p…
June 30, 2020

Recommended

10 Stocks to Invest in the Health Care Revolution
healthcare stocks

10 Stocks to Invest in the Health Care Revolution

These companies are fighting disease and improving our standard of care.
July 2, 2020
Cash In With This Gaming ETF
Technology

Cash In With This Gaming ETF

Cash in on the video gaming craze with this fund.
July 1, 2020
13 Best Vanguard Funds for the Next Bull Market
mutual funds

13 Best Vanguard Funds for the Next Bull Market

Optimistic that the bounce since March is indeed the start of the next bull market? Here are the 13 best Vanguard funds to help you make the most of i…
June 25, 2020
A Mid-Cap Fund With Big Gains
mutual funds

A Mid-Cap Fund With Big Gains

The fund’s best performers over the past year were software firms.
June 24, 2020