The Case for Active Management…from Vanguard…

The Case for Active Management…from Vanguard…

September 14, 2015 Uncategorized
Print Friendly
(Last Updated On: September 14, 2015)

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.

Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.

Join thousands of other readers and subscribe to our blog.

Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.

Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes,, and the CFA Institute. 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.

  • Bill Grant

    From the paper (top of pg. 14): “Vanguard active funds, for
    this time period, had a median after-tax performance
    that was 0.88% better than the comparable median
    result for non-Vanguard active funds. Indeed, during
    this time period [the 15 years ended
    June 30, 2012], the median after-tax Vanguard
    active fund performance was also 0.54% higher than
    the median index fund.”

    Do active managers deliberately or accidentally achieve tax efficiency relative to index funds? Is it a bit of both?

  • you have to work at tax efficiency when you are active and/or get the appropriate wrapper (eg. etf vs mutual fund). Passive buy and hold has a naturally tax edge because there are limited transactions.

    In general, if you are doing active investing with taxable money YOU NEED A TAX SOLUTION or it will not make sense–there simply isn’t enough alpha out there in the competitive marketplace