Actively Managed Funds at Vanguard vs Indexs

[CarFIRE]

Been doing some research on Morningstar.  Trying to simplify the portfolio over the holidays.  I find myself chasing returns a bit with a few exceptional actively managed funds.  I have been a customer at Vanguard so long I have access to a couple of closed funds and found others that are reasonable proxies for others that are closed. 

I've did part of my bonds in VBTLX(Vanguard Total Bond Market) However, I looked at VWIAX which is Vanguard's Wellesley Income Fund.  Invests in 2/3 Bond and 1/3 Huge Cap undervalued High Dividend payers to chase return.  Comparing the returns of this vs PIMCO total Return or other top Bond Funds since 2002, this fund puts out a better return and took less of a hit in the downturn.  Expense ratio of 0.18 isn't bad and it killed VBTLX over the same period.  Not using it as a pure bond replacement, it is still more Beta than VBTLX, but less than higher risk bonds.

The other ones to look at are:  VPMAX (Vanguard PrimeCap) and VHCAX(Vanguard  which I still have some of, but is closed now.  This sucker just rocks the index since forever. 0.36 expense isn't bad for the performance.  POGRX is the Odyssey Core Growth which is managed by the same team but still open.  Fee is 0.55% but if you are chasing performance this is a good option. 

The other thing I am doing is healthcare.  There are better funds than VGHAX(Vanguard Heathcare 0.30% ER) but this one has done very well.  This fund has outperformed the S&P since 1984!  With Obamacare and corporatization of healthcare, I don't see this trend stopping.  VGHAX seems to outperform the ETF pretty well.

The other half is in Index funds.

OK, MMMers.  Tear it apart....   

[wtjbatman]

The biggest drag on actively managed funds are the high fees. It makes sense that Vanguard's actively managed funds, with lower fees than their peers, would do better over time.

[Indexer]

"Past Performance is No Guarantee of Future Returns."

Yes, Primecap is a rock star.  I'm 100% index(as my username implies), and Primecap even tempts me.  You look at that thing and just pray that past performance is an indicator of the future.  Honestly Primecap tempts me because it has things that give it the ability to break the normal Active fund rules that lead them to failure.  1.  Its low cost... its Vanguard.. so it has a low hurdle to clear.  2.  Low turnover, not a lot of trading.  3.  Its CLOSED!  Most active funds that become rock stars die when the money flows in and they get crushed by their own weight.  Vanguard closed Primecap to prevent this. 

I personally wouldn't do Wellesley because I don't want to be that conservative, but for an active fund it is pretty nice. 

Healthcare is a sector fund.  It will be fine I'm sure.  I'm sure someone said the same thing about the Energy fund a year ago.

[GrayGhost]

As tempting as it is to get funds that track industries, what I have observed is that if you look at the big picture (5+ years of investing) companies are far more correlated to one another based on their market cap, rather than their industry. You might get a few time periods where energy large caps do better than healthcare large caps, or vice versa, but I remain unconvinced that trying to pick industries offers any advantage over trying to pick stocks.

I'll stick to asset allocation based on market cap, with some bonds and foreign investments thrown in. Least trouble, and, very likely, more profitable than trying to pick industries.

[CarFIRE]

"Past Performance is No Guarantee of Future Returns."

Yes, Primecap is a rock star.  I'm 100% index(as my username implies), and Primecap even tempts me.  You look at that thing and just pray that past performance is an indicator of the future.  Honestly Primecap tempts me because it has things that give it the ability to break the normal Active fund rules that lead them to failure.  1.  Its low cost... its Vanguard.. so it has a low hurdle to clear.  2.  Low turnover, not a lot of trading.  3.  Its CLOSED!  Most active funds that become rock stars die when the money flows in and they get crushed by their own weight.  Vanguard closed Primecap to prevent this. 

I personally wouldn't do Wellesley because I don't want to be that conservative, but for an active fund it is pretty nice. 

Healthcare is a sector fund.  It will be fine I'm sure.  I'm sure someone said the same thing about the Energy fund a year ago.

Good points.  I must've gotten Primecap years ago and didn't pay much attention prior to FIRE(Sad I know).  So I can still contribute $25k/year to it.  POGRX is very similar and their fees are higher about 0.53%, I believe.  I still have half in Index to sorta hedge my bets. 

I think Healthcare can/will get rocky in the next year but ultimately I believe they will continue to outperform the broader market long-term as it has for the last 30 years.  If the republicans hold congress and get their person in the whitehouse, that could be a problem. 

The one thing I would say about your 100% index strategy is what I learned the hard way about all or nothing in the past.  Hence, I am about 1/2 index and half chasing performance where it looks like upside potential is greater without meaninful increase in downside(at least longterm).  We'll see.  Thanks for the input!

[Indexer]

The one thing I would say about your 100% index strategy is what I learned the hard way about all or nothing in the past.  Hence, I am about 1/2 index and half chasing performance where it looks like upside potential is greater without meaninful increase in downside(at least longterm).  We'll see.  Thanks for the input!

Well I'm 100% index, but I do play with 10% of my portfolio.  I just use index funds to do it.  2012 & 2013 I tilted small cap :D.  2014 I felt like small caps had run up too much so I tilted large cap till I felt like even they were too expensive(based on just about every metric), then I kept the 10% in short term bonds, and bought back into stocks in early October when everything fell :D!  i'm not perfect though, I did buy back in before the bottom in October, I should have waited longer.  So far so good though.  Right now international looks cheap.  So I think I might tilt international in 2015; either that or go back to keeping it in short term bonds till valuations come down from nosebleed territory.  I thought about tilting energy, but I think that has more downside potential and it could take longer than 1 year to recover.

So yes I'm 100% index, but 10% of that is geared towards outperforming(and having fun!).

[Roots&Wings]

Primecap owner here.  Although I know that "past performance is no guarantee of future gains", the consistent after-tax performance of these funds beating the index got me years ago. 

If the management team changes significantly or they divest their fairly significant investment in their own fund, I would consider selling.