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The Independent Adviser for Vanguard Investors
•
July 2015
•
15
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
last 10 years, management companies
and individual portfolio managers have
come and gone. Vanguard fired almost
half of the original management teams
on the fund, and they hired many, many
more.
The fund started life with 15 dif-
ferent portfolio management teams
running its eight component funds.
Today there are no fewer than 20
teams made up of 49 portfolio man-
agers (I miscounted when I said 51
last month), each picking stocks and
throwing them into the pot that is
Diversified Equity.
In the end, the fund couldn’t quite
keep up with Total Stock Market,
though it gave it a good shot. Averaging
a collective expense ratio of 0.41%,
the fund was 24 basis points more
expensive, on average, than Total Stock
Market. And over the past 10 years,
its annualized return of 8.22% was
19 basis points behind Total Stock
Market’s 8.41% return.
Now, you could say that lagging
by 19 basis points when the expense
differential is 24 basis points is a win
for the active side. That’s all well
and good, except that, in the end, the
investor who put their money into
Diversified Equity didn’t do as well
as those with money in Total Stock
Market Index. Period.
Essentially matching the index
fund with a multimanaged mess like
Diversified Equity is precisely what
Vanguard is striving for, however. It
isn’t interested in showing that active
management can outperform, because,
it would also have to admit to funds in
its stable that underperform. That’s
why many of Vanguard’s active funds
have four or five or more management
teams running different sleeves of the
portfolio. If all those managers end
up producing “average” returns when
combined, they won’t deviate too far
from the benchmark they’re supposed
to be trying to beat.
And as long as Vanguard’s active
funds achieve the low hurdle of bench-
mark-like returns, their low-cost advan-
tage virtually guarantees the funds will
outperform their average, more expen-
sive peers. Vanguard’s marketing depart-
ment can then (and does) highlight their
peer-beating performance, which is due
almost entirely to low fees, rather than
above-average stock picking.
By the way, while Diversified Equity
and Total Stock Market were earning
their 8.2% and 8.4% returns over the last
10 years, which funds were doing better?
Pretty much every one of the domes-
tic equity funds that you and I own,
like
Health Care
(up 13.6%),
Capital
Opportunity
(10.9%),
PRIMECAP
(10.7%),
PRIMECAP Core
(10.4%),
Dividend Growth
(9.2%) and
Selected
Value
(9.1%). Compounded over 10
years, these funds have generated some
astounding profits for you and me,
Diversified Equity’s
10-Year Anniversary
Fund
June 10, ‘05 –
June 10, ‘15
Health Care
13.6%
Capital Opportunity
10.9%
MidCap Growth
10.9%
PRIMECAP
10.7%
SmallCap Growth Index
10.4%
PRIMECAP Core
10.4%
Extended Market Index
9.7%
SmallCap Index
9.7%
Tax-Managed SmallCap
9.6%
MidCap Index
9.6%
Dividend Growth
9.2%
Selected Value
9.1%
Explorer
9.1%
Growth Index
9.1%
SmallCap Value Index
8.8%
Strategic Equity
8.7%
Morgan Growth
8.7%
Convertible Securities
8.6%
Equity Income
8.5%
U.S. Growth
8.5%
Total Stock Market Index
8.4%
Tax-Managed Capital Appreciation
8.4%
Capital Value
8.4%
Diversified Equity
8.2%
LargeCap Index
8.2%
Wellington
8.0%
Emerging Markets Index
8.0%
500 Index
7.9%
International Explorer
7.6%
REIT Index
7.5%
Windsor
7.4%
International Growth
7.4%
Social Index
7.4%
Windsor II
7.3%
Target Retirement 2045
7.3%
Growth & Income
7.3%
Value Index
7.2%
Balanced Index
7.1%
STAR
7.1%
Wellesley Income
7.0%
U.S. Value
7.0%
Target Retirement 2035
6.9%
Global Equity
6.9%
STAR Growth
6.6%
Tax-Managed Balanced
6.6%
Target Retirement 2025
6.5%
Energy
6.5%
STAR Mod. Growth
6.2%
Target Retirement 2015
6.1%
International Value
6.0%
Total International Index
5.7%
European Index
5.7%
Admiral Developed Markets
5.6%
STAR Cons. Gro.
5.4%
Target Retirement Income
5.3%
Pacific Index
5.3%
STAR Income
4.6%
Market Neutral
1.9%
Precious Metals & Mining
1.1%
Note: 10-year annualized returns from 6/10/05 through 6/10/15.
Diversified Equity’s
Growth Has Slowed
Assets (millions)
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
6/05
6/06
6/07
6/08
6/09
6/10
6/11
6/12
6/13
6/14
6/15
49 Heads AreNot
Better Than One
6/05
6/06
6/07
6/08
6/09
6/10
6/11
6/12
6/13
6/14
6/15
Diversified Equity
Total Stock Market Index
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
>
Matching the index fund
with a multimanaged mess
like Diversified Equity is
precisely what Vanguard is
striving for.