(PUB) Morningstar FundInvestor

September 2 014

Morningstar FundInvestor

9

assuming that each of Vanguard’s merged or liqui- dated funds was a relatively poor performer, the active funds held their own.

With taxable-bond funds, the indexes comfortably won the contest. But the active funds were plenty good.

Which raises the question: What about the other major investment areas?

Active Versus Passive Vanguard Taxable-Bond Funds 15-Yr Category Ranking, by Total Return

70

I first looked at allocation funds. There was a slight advantage for active funds, with to my knowledge one active fund disappearing during the time period (Growth Allocation). The number of funds of each type is given in the chart; obviously, in this case it is a very small sample size indeed for the passive group!

60

50

31

40

22

30

20

10

Active Versus Passive Vanguard Allocation Funds 15-Yr Category Ranking, by Total Return

Active (9)

Passive (3)

70

Data through July 31, 2014. Source: Morningstar Data.

60

One may object that Vanguard’s active funds assume more risk. I don’t believe that to be the case. The company’s actively managed funds are run cautiously, often diversified among multiple managers. Another objection is that while the averages may sort themselves out for active management, investors do not earn an average. They earn the return from a single fund, the performance of which is not known in advance. Thus, index funds are more attractive because they do not deliver surprises, whereas the unlucky active investor could land a spectacular dud. This is a stronger argument, as evidenced by the case of the disappearing active Vanguard U.S. stock funds. measures of success, different groupings. But it seems unlikely that these changes would put very cheap active funds and very cheap passive funds (after all, this column didn’t use just any index funds, it used the funds from the world leader) very far apart. Both species of funds figure to fare well. The question is, will active management heed the call? œ Contact John Rekenthaler at john.rekenthaler@morningstar.com Certainly, this is far from the final word on the subject. Different time periods could be used, different

50

40

29

27

30

20

10

Active (8)

Passive (1)

Data through July 31, 2014. Source: Morningstar Data.

Next, I looked at international-stock funds. The advantage was larger here. In this case, an index fund has disappeared (Developed Markets Index).

Active Versus Passive Vanguard Intl. Stock Funds 15-Yr Category Ranking, by Total Return

70

60

45

50

35

40

30

20

10

Active (4)

Passive (4)

Data through July 31, 2014. Source: Morningstar Data.