Put 40 managers from 18 different investment firms onto one fund and what do you think will happen? I’ll bet you know the answer. It turns an investment into a mess.
Click to EnlargeAlternately, if you’re Vanguard, you’ll say that Vanguard Diversified Equity Fund (VDEQX) offers investors a great way to access active management. Or as they like to put it, the fund provides a “mosaic of investment approaches.” Mosaic, or something more akin to a nursery school’s finger painting? Also, Diversified Equity gives investors “broad, low-cost exposure to the U.S. stock market,” according to Vanguard chairman Bill McNabb. Of course, that’s the exact wording he uses to describe Vanguard Total Stock Market Fund (VTSMX)as well. So, is this fund as good as Total Stock Market? Hardly.
For all the talk of Vanguard’s vaunted criteria for choosing portfolio managers — something it ballyhoos in Diversified Equity’s latest shareholder report — the fund simply can’t keep up precisely because it has such a “mosaic” of managers.
You don’t have to take my word for it. Take a look at the graph below, which shows the relative performance of Diversified Equity since its June 2005 inception against Total Stock Market. That steadily falling line means the fund is lagging with only brief periods of outperformance. Diversified Equity has topped the index fund on a monthly basis about 50% of the time. But, like the old fairy tale, when it’s good it’s good, but when it’s bad it’s horrid.
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.
Even the manager changes at Windsor and Growth & Income haven’t seemed to help the overall performance.
So, whether Vanguard’s approach to active management works or not, here’s one bit of trivia for those looking to score a meeting with Vanguard’s manager selection group. The odds are definitely in your favor if your name is Christopher or James. Nine of the 40 managers working on Diversified Equity, or 22%, fall into that camp.