The Case for Active Management…from Vanguard…

The Case for Active Management…from Vanguard…

September 14, 2015 Uncategorized
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Vanguard is a poster child for passive management and is among the companies we respect the most. You’ll often hear investors/advisors parroting their use of passive funds as an end-all be-all to the world’s investment problems. And in many respects passive management is a move in the right direction; however, passive management is not the driving force here–fees and taxes are the driving force.

This simple point gets lost on people when you mention active investing. The knee-jerk reaction to active investing is that it is “evil” because it isn’t passive. This isn’t a well-thought out cost/benefit analysis.

When investing in active strategies the cost/benefit analysis is much more nuanced. But instead of trying to explain this ourselves, we will defer to Vanguard. They have a wonderful white paper outlining a framework for thinking about successful active management. The summary bullet points are below:

There is strong theoretical and practical evidence that most actively managed equity funds will underperform their benchmarks.

In the end we find that low-cost active talent can achieve outperformance; and that investors, to the extent they stick with a disciplined approach, can be successful using actively managed funds.

Remarkable! Support for active management coming out of Vanguard. What next? Flying pigs?

And here is an image outlining the aspects to consider when diving down the active management rabbit hole:

vanguard performance drivers

Again, here is the report if you are interested in learning more.

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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.