Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship

CHAPTER 12

Performance of Actively Managed versus Index Funds The Vanguard Case

EDWARD TOWER, Ph.D.

Professor of Economics, Duke University Visiting Professor, Chulalongkorn University

 

 

 

Paul Merriman: How does Vanguard justify with this great family of index funds also having all of these actively managed funds?

 

John C. Bogle: Well, I don’t run Vanguard any longer, but I will take plenty of responsibility for having those active funds in all of the years I ran it. And the answer to that is really a couple of things. One, a lot of investors, no matter how persuasive the case for indexing is, and it’s overpoweringly persuasive, just don’t quite get it. They want a little more activity. They want something to watch. Index funds, as you all know, are roughly as exciting as watching paint dry or maybe watching the grass grow. They create great returns but they’re not that exciting. So what we tried to do and what I tried to do personally was pick good managers, and that’s very, very hard to do. I want to be clear on that, and I have some hits and some runs and some errors in that category, have funds with multiple managers, so you get a much broader diversification, which is not unlike an index fund. . . .[For example, take] our Windsor II fund. It’s a large cap value fund. And it has five different managers. I think that’s the number now. And so you are going to tend to have a value average return for that fund. And then, actually, make sure you have the other two big advantages ...