Mike’s note: This is a guest post from Nisiprius — a prolific, anonymous member of the Bogleheads forum from whom I (and many other investors) have learned a great deal. When he’s not sharing his wisdom with us, he is a semiretired software engineer who lives in the New England area.
John C. Bogle once wrote, “the key to whatever success I may have enjoyed… is that the Lord gave me enough common sense to recognize the majesty of simplicity.”
Recent changes in Vanguard’s website look to me as if Vanguard has tightened its focus on indexing and on simplicity for personal investors.
But isn’t “Vanguard advocates indexing” the non-story of all time?
Maybe not. Vanguard has always had a dual personality. It was clearly visible in the “core funds” web page as it appeared for many years:
Vanguard used to include nine funds in their “core” category. Besides Prime Money Market, the other eight were perfectly split between index funds (Total Bond Index, Balanced Index, Total Stock Market Index, and Total International Stock Index) and actively managed funds (Short-Term Investment-Grade Fund, Wellesley Income, Wellington, and Diversified Equity).
Vanguard’s New “Core”
Today, however, Vanguard names only four “core funds”: Prime Money Market, Total Bond, Total Stock, and Total International. They suggest a decision framework that calls for first choosing a stock/bond/cash asset allocation, then implementing it with these funds.
On Vanguard’s personal-investors’ website today, almost all roads lead to Total Bond, Total Stock, and Total International — either directly or via “all-in-one” funds-of-funds which are mostly simple three-fund portfolios of the core funds.
Actively managed funds are out of the spotlight.
Vanguard’s actively managed Wellington Fund used to be as famous as its Five Hundred Index Fund. (The Wellington Fund antedates the founding of Vanguard by quite a bit. Want a thrill? Go to Morningstar’s main page, type VWELX in the “quote” box, click on “more” above the growth chart, and then “maximum” on the expanded chart — and stand back. Seriously, take a look.)
Today, a retail investor who begins at Vanguard’s main page and starts exploring is probably not going to find Wellington unless she is looking for it. You can find it by searching by name or by looking at the “all funds” table, but you are not likely to stumble across it by clicking your way through Vanguard’s fund decision pathways.
A few years ago, Vanguard routinely issued nuanced statements about complementary roles for active and index funds. In 2007, Vanguard’s chief investment officer, Gus Sauter, published a paper entitled “A Framework for Developing the Appropriate Mix of Indexing and Active Management.” Using Modern Portfolio Theory and efficient frontier charts, he said “These analyses demonstrate the asset allocation advantages to an investor of combining index and actively managed funds. They also further the rationale for an overall core-satellite approach, comprising index funds for the core and actively managed funds as satellites.”
But now, Vanguard’s new core funds page does not invite investors to think in terms of “core” and “satellites.” In the Bogleheads forum, the phrase “three-fund portfolio” is used to refer to a portfolio which uses only basic asset classes — usually a domestic stock ‘total market’ index fund, an international stock ‘total market’ index fund and a bond ‘total market’ index fund. The core fund page is now an illustration of how to build exactly this kind of three-fund portfolio.
Vanguard’s All-in-One Funds
If we look elsewhere, we notice that (for example) Vanguard’s Target Retirement 2040 fund is, literally, a three-fund portfolio: Total Stock, Total Bond, and Total International. This is a stunning contrast to the complex compositions of other firms’ target-date funds:
- T. Rowe Price Retirement 2040 uses 10 funds,
- ARDVX American Century LIVESTRONG 2040 uses 13,
- MFS Lifetime 2040 uses 16,
- American Funds 2040 Target Date uses 17,
- Schwab Target 2040 uses 19, and
- Fidelity Freedom 2040 uses no less than 20 funds.
It’s worth noting that, until 2010, Vanguard’s Target Retirement funds were slightly more complex — owning three separate funds (Europe, Pacific, Emerging Markets) in the place of Total International.
The same theme is evident in recent changes to Vanguard’s LifeStrategy funds. These funds-of-funds are all-in-one portfolios for specific life stages or specific degrees of risk tolerance that hold a stable allocation over time. However, they used to include a significant slice of the Vanguard Asset Allocation fund, a “tactical asset allocation” fund that shifted back and forth between stocks and bonds in response to “quantitative models.” Because the LifeStrategy funds owned this Asset Allocation Fund, they also shifted stock exposure up and down. In late 2011 however, Vanguard revamped these funds and they are now, yes, simple three-fund portfolios with fixed allocations.
The retail website does have a path guiding the investor to Vanguard’s Managed Payout funds, which do not fit the pattern. They use a university-endowment-like strategy and employ nontraditional assets, and tactical allocation. Launched in 2008, they hit a perfect storm, and to date have attracted only $0.747 billion in assets. They are certainly not “simple three-fund portfolios.” Nevertheless, each invests over half of its portfolio in, you guessed it, Total Stock, Total Bond, and Total International.
How far does Vanguard’s emphasis on the four “core funds” go?
If I’ve added the right things, the “total assets” numbers for Prime Money Market + Total Bond + Total Bond II + Total Stock + Total International add up to $510 billion. That’s a huge number, but it’s only 30% of Vanguard’s total holdings of $1,700 billion. And by one count Vanguard offers more actively managed funds (67) than index funds (53).
But Vanguard, at least as it presents itself to retail investors on its website, seems to be shining the spotlight on their huge “core” index funds, and on three-fund portfolios made from them. It looks like a rededication to “the majesty of simplicity.”