The Vanguard Group is famous for its low-cost index funds, especially now that passively-managed funds have generally averaged higher returns than than their actively-managed peers for the past three years. But active vs. passive performance is cyclical and index funds may not be the winners over the next three years.
When the market moves into transitional periods, as it is arguably entering now, investing can become more of a stock picker’s game than an indexing one. And the edge that low expense ratios give Vanguard index funds extends over to Vanguard actively-managed funds.
For example, the average expense ratio for a large-cap growth stock mutual fund is about 1.25%. My research revealed the highest expense ratio for a Vanguard actively-managed large growth fund was 0.5%. That 0.75% difference is a huge advantage in the form of a performance boost that makes the best Vanguard funds tough to beat.
Here are three of the best Vanguard funds with active management.
Best Vanguard Funds With Active Management: Vanguard Windsor (VWNDX)
To kick off our list of the best Vanguard funds with active management, we begin with the classic Vanguard Windsor Fund Investor Share (VWNDX).
The lead fund advisory firm, Wellington Management Company, has been at the helm since the fund inception in 1958. Although new managers have been added to the team in the past three years, the Wellington management backbone is still in place and overseeing the majority of assets.
Vanguard Windsor’s performance certainly supports the evidence, as the three-year and five-year returns both beat more than 90% of its large value category peers. The 10-year performance ranks in the top half.
You’ll keep more of your money with the low expense ratio of 0.37%, or $37 for every $10,000 invested, for the Investor class shares, and minimum initial purchase is just $3,000.
Best Vanguard Funds With Active Management: Vanguard Selected Value (VASVX)
Vanguard Selected Value Fund Investor Shares (VASVX) is a mid-cap value version of Vanguard Windsor — a well-managed mutual fund that has proven that smart stock selection and low expenses are what it takes for an actively managed fund to outperform the category averages.
In recent years, as most actively managed funds have lost to the major market indices, the majority of actively managed mid-cap value funds have lost to Vanguard Selected Value. The three-year performance rank is 38th percentile and the five-year rank is 30th.
Like Vanguard Windsor, Vanguard has recently added a sub-advisor for Vanguard Selected Value. However, it appears as if the new management adds value by expanding the capacity to manage more assets without watering down the returns. Also, the lead manager, James P. Barrow, is still at the helm as he has been for more than 15 years.
Selected Value’s expense ratio is just 0.43% and the initial investment minimum is $3,000.
Best Vanguard Funds With Active Management: Vanguard Tax-Managed Balanced (VTMFX)
Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX) is among the best conservative allocation funds on the planet.
There may not be a single other mutual fund that can outperform more than 90% of category peers for the year-to-date, one-, three-, five- and 10-year returns, but Vanguard Tax-Managed Balanced accomplishes this rare feat.
One caveat for conservative investors is that the portfolio has a stock allocation of just under half of its assets, whereas the average conservative allocation fund has about 30% allocated to stocks.
With that said, bond-heavy funds will potentially be less tax-efficient and produce lower returns, or even lower yields, than a fund like Vanguard Tax-Managed Balanced.
To manage the added market risk, VTMFX concentrates its equity holdings in large-cap names like Apple Inc. (AAPL) and Exxon Mobil Corporation (XOM) and its fixed income exposure is primarily high-quality, intermediate-term municipal bonds.
Although the minimum initial investment is $10,000, Vanguard Tax-Managed Balanced can make a fine core holding and is one of the best Vanguard funds for retirees.
The expense ratio is a cheap 0.12%.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.