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Vanguard Adds 5 Active Equity Funds to Personal Advisor Services

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What You Need to Know

  • All five funds have concentrated portfolios; three are only on Vanguard's Personal Advisor Services platform.
  • Vanguard newsletter co-editor Dan Wiener says the offering is a major change from Vanguard's usual passive approach.
  • Michael Kitces questions Vanguard's use of proprietary funds in the new offering.

In another example of the growing popularity of actively managed funds, Vanguard, the champion of passive index investing, is adding a five-fund active equity offer to Vanguard Personal Advisor Services (PAS), its digital advisor service that includes human advisors. All five are Vanguard funds.

The fund giant had announced plans for the additions in August.

Three of the funds — the Vanguard Advice Select Dividend Growth Fund and Vanguard Advice Select Global Value Fund, managed by Wellington Management Co., and Vanguard Advice Select International Growth Fund, managed by Baillie Gifford Overseas — are exclusive to PAS clients. All take “a more concentrated approach” involving fewer holdings than other Vanguard actively managed funds. Their fees range from 0.40% to 0.45%.

The two remaining funds — Vanguard International Core Stock Fund and Vanguard Capital Opportunity Fund — were already available as standalone funds to Vanguard clients, but Vanguard is removing the $25,000 annual investment limit for the Capital Opportunity Fund for PAS clients, which has been closed to new investors outside PAS. Their fees are 0.36% and 0.37%, respectively. PAS charges a 0.30% advisory fee and has a $50,000 minimum.

Vanguard says the active equity offer “will primarily serve as a complementary allocation to PAS clients’ broadly diversified and low-cost index fund core portfolio holdings.” PAS advisors will incorporate the new funds into their clients’ customized portfolios if they deem the funds suitable based on clients’ risk tolerance and investment objectives.

“Vanguard has thoughtfully crafted this new active equity offer for Personal Advisor Services to meet the evolving needs and preferences of our clients,” said Jon Cleborne, head of Vanguard Personal Advisor Services, in a statement.

Dan Wiener, co-editor of The Independent Adviser for Vanguard Investors, writes that the addition of the active funds to a mainly passive, index-based offering “is a 180-degree turn” in Vanguard’s thinking. The strategies can, at times, produce higher overall return than existing fund options on the PAS menu but also add more risks, according to Wiener.

Still, Wiener’s analysis of the new strategies, which he says are essentially concentrated versions of existing active mutual funds, show strong performance led by accomplished portfolio managers.

The concentrated Advice Select Dividend Growth strategy, which resembles that of the Wellington Select Quality Equity Fund, has outperformed the Vanguard Dividend Growth portfolio with a 13.7% annualized return vs. 11.1% for Vanguard Dividend Growth over almost 14 years. During its worst 12 months, however, it lost more than Dividend Growth — 29.5% vs. 27.4%, according to Wiener.

Morningstar analyst Alec Lucas agrees. In a mid-September analysis of the then forthcoming Vanguard offering, Lucas noted that “similar if not identical strategies” of the five-fund portfolio show “impressive” results with “reasons for optimism for the long term.”

But “their risks and Vanguard’s history with aggressive active launches argue for some caution,” writes Lucas.

Financial planner and blogger Michael Kitces, who heads planning strategy at Buckingham Wealth Partners and is the executive chairman and co-founder of XY Planning Network,  questions the use of Vanguard’s own active funds in this expansion of investment options at Personal Advisor Services.

“Should Vanguard really get a free pass on the conflicts of interest in using proprietary product as a fiduciary just because they’re Vanguard?” asks Kitces, in an emailed response to ThinkAdvisor questions. “Are we really making the case that no other active management fund on the planet can EVER be as good as a Vanguard fund?”

Kitces suggests that Vanguard charge a higher fee for PAS investors and then waive all fund fees so that the client pays the same fee no matter what fund options they choose.

Vanguard notes in its press release announcing the new active equity offer for PAS that the fees of its three new select funds are less than half the average expense ratio in their fund category.