When most investors hear the name Vanguard funds, they think of indexing. After all, Vanguard founder John Bogle created the idea of passive investing when he launched Vanguard 500 Index Fund tracker (NYSEARCA:VOO) decades ago. Today, billions of investor dollars sit in these passive Vanguard funds.
But surprising to many investors, Vanguard is a pretty decent active shop as well.
The firm has plenty of outperforming active mutual funds on its roster, and they scarcely get any real mention from market pundits or investors.
However, these active Vanguard funds could be your portfolio’s best friend. The key is their stellar management, and like all Vanguard mutual funds and ETFs, they feature very low expensive ratios. That allows them to overcome the main hurdle against active management — high fees.
In the end, Vanguard shows that active management can still work and perform well for industries. With that in mind, here are three active Vanguard funds that you should consider for your portfolio.
Active Vanguard Funds to Buy: Vanguard Health Care Fund Investor Shares (VGHCX)
Expense Ratio: 0.36%, or $36 per $10,000 invested
In the pantheon of great mutual fund managers, Ed Owens hardly gets any mention.
But Owens before his retirement in 2012, managed to guide the Vanguard Health Care Fund Investor Shares (MUTF:VGHCX) to some of the best returns of any fund on the planet, outpacing even most of Vanguard funds passive offering.
VGHCX has managed to return an annual 17% since its inception back in 1984. Today, that legacy of great performances continues with manager Jean Hynes.
Hynes has been pretty good at predicting the future trends when it comes to what health care will look like. This includes a hefty dose of aging populations, delivery of healthcare, growth in emerging markets and the revolution in biology/genomics. This search takes Hynes across the globe in search of healthcare opportunities. This includes plenty of emerging market muscle.
The focus on value has worked well. Even with the recent hiccups, the active Vanguard fund still has managed to produce a near-17% annual return over the last five years.
Active Vanguard Funds to Buy: Vanguard PRIMECAP Fund Investor Shares (VPMCX)
Expense Ratio: 0.39%
“Growth at a reasonable price” investing tries to blend both traditional value and growth styles. More importantly, its one of the few areas that active management can really make the difference.
And there are plenty of Vanguard funds that specialize in the style, but none are as good as the Vanguard PRIMECAP Fund Investor Shares (MUTF:VPMCX).
VPMCX is run by the whiz-kids at PRIMECAP Management Company. The sub-managers use plenty of screening methods and deep analysis to find out-of-favor growth companies at attractive valuations. And while they can own all market-cap sizes, traditionally the fund has focused on the sweet-spot of mid-caps. This emphasis has managed to guide VPMCX to a 13% annual return since its inception in 1984.
The caveat here is that not everyone can buy into VPMCX. The fund is closed to new investors through Vanguard. However, many 401k plans that offer the mutual fund will still allow you purchase shares. And given the funds’ continued excellent track record of growth, you may just want to do that.
Active Vanguard Funds to Buy: Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX)
Expense Ratio: 0.11%
Broad index funds have long been staples of taxable accounts because they rarely have capital gains associated with them. But actively managed funds can thrive here as well, and Vanguard funds offer one of the best choices for investors.
The Vanguard Tax-Managed Balanced Fund Admiral Shares (MUTF:VTMFX) owns both stocks and municipal bonds — set at roughly 50/50 for each asset class. The idea is to seek a tax-efficient total return made up of tax-free income from the munis and capital growth/ modest taxable current income from the stocks.
VTMFX will only include stocks that pay qualified dividends and it rarely trades them, holding them for extended periods of time to reduce taxes. What investors get is a high return without having too large of a tax burden.
As for that return, VTMFX has managed to provide a 7.42% annual return since its inception in the 1990s. That’s not too shabby considering half its portfolio is in boring muni-bonds.
The only downside is VTMFX’s high initial investment of $10,000. However, for some investors using a Vanguard advisor, that number is reduced to $0. Expenses are dirt cheap at 0.11%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.