For all the hoopla around ETFs and Vanguard’s huge role in that market (plus its dominance in indexing) Vanguard’s actively-managed equity mutual funds actually had net inflows in 2013, something I haven’t seen in years.
Which mutual funds and managers were the beneficiaries? Well, one of my favorites in the active management sphere, Don Kilbride’s Vanguard Dividend Growth Fund (VDIGX), took in a net $3.8 billion. Vanguard Equity Income Fund (VEIPX), which is run by teams from Wellington Management and Vanguard, saw net inflows of $2.6 billion. And another of my favorite mutual funds, Vanguard Selected Value Fund (VASVX), run primarily by Jim Barrow and Mark Giambrone of Barrow, Hanley, Mewhinney & Strauss took in a net $1.5 billion.
That being said, these active management inflows were small compared to the massive dollars pouring into all manner of indexed products, from open-end funds to ETFs. VanguardTotal Stock Market Index (VTSMX), in all its various forms, took in $27.3 billion and the new Vanguard Total International Bond Index (VTIBX), helped in no small measure by its addition to myriad Target Retirement funds-of-funds, took in a net $19.5 billion.
Did any Vanguard funds actually see outflows? Oh yeah! Investors bailed on Vanguard Inflation-Protected Securities Fund (VIPSX) to the tune of $14.7 billion (Vanguard did its share of selling as well, trading it for its shorter-duration sibling in several Target Retirement funds-of-funds.) The mutual fund, with $26.5 billion in assets has shrunk by 40% over the course of the last 12 months. Vanguard GNMA Fund (VFIIX) saw net outflows of $12.1 billion. The once mighty mutual fund peaked at more than $40 billion in assets in 2012 and has slimmed down to less than $27 billion. Vanguard Emerging Markets Stock Index Fund (VEIEX) also couldn’t hold onto assets and saw $9.2 billion head for the exits though it’s still a $62.4 billion behemoth.
What’s my take on this? Frankly, I’m happy as can be when investors put their money into index funds and leave the mutual funds with great active managers to me and my clients. I’m sorry they’ve discovered Don Kilbride and the Barrow-Giambrone team but I’m sure that one or two bad quarters will have performance-chasers scurrying away again. The more money that piles into index funds the better as it means fewer dollars chasing great investments, rather than average investments.
So, does active management work? It does if you can identify the great active managers and put them together into a cogent, diversified mutual fund portfolio, which I’ve been doing for more than two decades.
With final 2013 data in, here’s how the four Model Portfolios from my newsletter stack up (obviously, the last one is an index-only portfolio but its track record, begun in Mar. 1995 and designed to mimic the active “Growth” portfolio, still shows the value of diversification.):
Happy New Year. And if anyone asks you for fund recommendations just send ‘em over to an index fund and keep the great managers to yourself.
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.