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Vanguard: Low-Cost Active Still Has Value

Christine Benz

Note: This video is the fourth of a six-part interview between Morningstar director of personal finance Christine Benz and Vanguard president and CEO Tim Buckley.

Christine Benz: Following up on the discussion about active management or noting that flows have been really robust into index products, not so much into even good-quality active funds--I'd like your take on that phenomenon. Also, does it affect your thinking about Vanguard's own lineup of actively managed products?

Tim Buckley: I worry about active management because right now the baby is being thrown out with the bathwater. There are some great active managers out there. Our offerings by themselves have--if you look at our funds, 90% of them outperform their competition over 10 years. If you look at our active managers, you can look at 10-, 15-, 20-year time periods and you asset-weigh them, they have outperformed their benchmarks. There's great value to be had with active management. 

The problem is, active management as a whole has underperformed the market because it's too expensive. This comes back to that high cost. If all the active managers out there, those that are trying to get into indexing with a low-cost index fund here or there, if they just lower their expenses and share some of the alpha, that gross alpha, with their clients, the business would be much better off, active management would be much better off. We want to make sure that our clients still recognize the role that active can play in someone's portfolio. We think active will come back and will have that time, but only low-cost active. High-cost active should be dead and should remain that way.

Benz: Is there any thought to kind of culling the lineup, the active fund lineup, in light of the fact that investors just don't seem to have a lot of interest there?

Buckley: When you look at our lineup, all our active funds are quite sizable. We will always look to rationalize some of them if they have drifted over the years. The mandates are very similar. But usually, the mandates are specific. We have to be very careful when we decide, OK, well, there's a few billion dollars in this fund, even if it's not getting cash flow, it's serving the purpose in someone's portfolio. We're always very careful about just random culling. As you know, we are not looking for how do we make the most money; we are trying to make sure that investors can get to the best outcome. If it's playing a role in someone's portfolio, we have to be very careful.