I want to direct your attention to the June edition of Charles’ Balcony. It’s yet another fine example of Charles’ research orientation and depth. Good work Charlie. It illustrates how an informed simplistic investment approach can eviscerate complex, costly alternatives in the portfolio construction arena. Please give it a thoughtful read.
American Funds is famous for its in-depth research, independent bottom-up decision making, and heavy-weight cost structure. In much earlier days, their process appears to have delivered a performance edge, that more lately seems to have suffered significant erosion. A more professional investment cohort looks like they are neutralizing one another and battling to near zero positive Alphas.
Active fund management is struggling to demonstrate its superiority over Indexing.
That’s particularly difficult for the American group because of its fees. But that’s also the case when those fees are reduced. Cost leader Vanguard offers a rather complete array of both actively and passively managed funds in almost all fund categories. That offers a superior, natural opportunity for a real world test. How have the Vanguard products performed lately in a direct competition?
A 2015 article from the AssetBuilder website has addressed that issue and provides a partial answer. Here is a Link to that excellent study:https://assetbuilder.com/knowledge-center/articles/do-vanguards-indexes-beat-their-own-actively-managed-funds
Some active Vanguard funds do and some do not deliver as advertised. I’m sure conclusions are timeframe sensitive.
Even with Vanguard’s low cost structure, the hurdle is a severe challenge for active fund managers. Over the 10-year timeframe of the referenced study, please note how similar the cumulative returns were. Advantages were minor in terms of that meaningful measurement.
Are the incremental and uncertain payoffs worth the risk of choosing a deadbeat manager? Everyone has their own answer to that question. My answer is a portfolio split that includes both active and Index holdings.
Thank you Charles.