Mutual fund datapoint of the day

By Felix Salmon
September 29, 2010
Bloomberg headline is pretty clear, at least by Bloomberg standards: "Fidelity Loses Top Mutual-Fund Spot to Bogle's Indexing".

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The Bloomberg headline is pretty clear, at least by Bloomberg standards: “Fidelity Loses Top Mutual-Fund Spot to Bogle’s Indexing.” The news: Vanguard, the home of passive investing, now has more assets than Fidelity, the home of stock picking.

But this was puzzling:

In the 10 years ended Aug. 31, actively run domestic stock funds returned 0.9 percent a year compared with an annual loss of 2 percent for index funds, data from Chicago-based Morningstar Inc. show. Fidelity’s equity funds returned an average of 2.1 percent a year versus 1.2 percent for Vanguard’s, according to Lipper.

I’d love to learn more about this ten-year outperformance of active funds over passive funds: it’s something I’ve never heard of before. Is there a survivorship bias here? How are the averages calculated?

And then there’s the enormous outperformance between Vanguard’s funds (+1.2 percent, annualized) over index funds (-2% percent, annualized). How is that possible?

Eventually, much lower down the article, a hint appears:

Indexing doesn’t explain all of Vanguard’s success. About 49 percent of the firm’s assets are in actively run funds, Rebecca Katz, a Vanguard spokeswoman, said in a telephone interview.

That shocked me. Jack Bogle’s company has half its AUM in active funds? Wow. I’d love to know how that number has evolved over time, and especially recently. After all, if Vanguard is overtaking Fidelity because people are pouring money into the actively-managed Wellington Fund and similar, that rather undermines the main thesis of the article.

And if Vanguard’s index funds have been losing something on the order of 2 percent a year while its overall performance is +1.2 percent, then that implies its active funds have been outperforming not only the indices but also Fidelity. In other words, what we’re seeing here might not be a move from active to passive, so much as a move from Fidelity’s funds, which were hot in the 80s and 90s, to Vanguard’s actively-managed funds.

In any case, if there’s a shift from active to passive — and I believe that there is — I suspect that it’s going to show up mostly in ETF figures, rather than in a preference for Vanguard funds. Vanguard’s AUM isn’t a good proxy for the popularity of passive strategies in general, partly because it has all those active funds, and partly because it’s a small player in the ETF space.

As for Fidelity, it’s surely still near the beginning of a long, slow decline. The world of fund management moves glacially yet inexorably, and although Fidelity will certainly continue to make billions of dollars in profit for many years to come, its best days are now far behind it. Vanguard’s, too, most likely. The future looks much more like it will belong to shops like Blackrock and Pimco.

(Incidentally, what’s going on with Bloomberg’s SEO and URL management? Check out the web address of the story, and it looks like something very different indeed. Most peculiar.)


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Many of Vanguard’s bond funds are not index funds even though they are managed like index funds, for example, their muni bond funds. This could account for much of the tilt to active management.

Posted by 3oosion | Report as abusive

Bogle’s okay with active, it’s the costs that bother him. Index funds are just cheaper to run.

Vanguard is gaining on the other ETF vendors:

Posted by chrismealy | Report as abusive

@Felix: I’d say its the ‘slug’ generator on their CMS that got indexed wrong:-)

But back to the core of the article, where I can see Vanguard really gaining in the marketplace is through its ongoing marketing of a ‘low-cost’ strategy as opposed to the actual index vs. active managed debate.

The recent crisis has brought to investors minds what the MER (management expense ratios) actually entail to long-term performance and Vanguard tries very hard to market this across all its funds (including its active ones). I don’t know the actual specifics (maybe more research there?) but this would prove a stronger value-proposition for an investor: after all that is the forward looking metric with a certain degree of certainty. Performance measures are historical after all – who knows if the future will hold up the value of active of indexed or vice versa… But a declining MER, that can be banked on right away and in the future.

Tariq Scherer

Posted by tariqscherer | Report as abusive

For more on the Vanguard vs. Fidelity story: changing-of-the-guard/

Posted by Sidoxia | Report as abusive