Best Vanguard Funds: Active Funds Edition

I recently wrote a post outlining what I believe are the best Vanguard index funds in each major asset class. While I favor index funds for my own investment portfolio (see my IRA allocation), many investors prefer the thrill of potentially beating the market that comes with actively-managed mutual funds.  While the odds are definitely against you, they are not overwhelmingly so if you keep a few key concepts in mind.

Anatomy Of Good Active Fund

I’ve written on this subject previously so I’ll keep it short here. To have a realistic shot at beating or at least matching its benchmark, an active fund should look something like this:

1. Have Low Costs – The main advantage index funds have over actively-managed funds is that they tend to be much, much less costly. While there are other advantages of owning index funds (avoiding style drift, manager risk, etc), the cost advantage is by far the dominant one. The best-performing active funds, on average, also tend to be the lowest-cost active funds. This is no coincidence. Fortunately, Vanguard’s active funds have extraordinarily low expense ratios relative to their peers, giving them a serious long-term advantage.
2. Stable Management – This isn’t nearly as important as the cost issue, but it still factors in. A fund whose manager changes every other year is likely not going to post top-decile performance numbers over the long term.

The Best Actively-Managed Vanguard Funds

While the distinction between funds dedicated to various asset classes isn’t quite as clear with active funds as it is with index fund due to issues like style drift and loose portfolio mandates, I think it’s still a useful classification criteria. After all, a large-cap value fund is still going to invest predominantly in large-cap value stocks even if they do occasionally delve into smaller and/or growthier issues.

Best Domestic Stock Fund

And The Winner Is: Vanguard Selected Value (VASVX) - I almost chose the PRIMECAP Fund (VPMAX), but that fund is closed to new investors (unless you have a ton of money, that is). The Selected Value fund has reasonably low expenses, focuses on the smaller end of the market cap spectrum (it’s classified as a mid-cap value fund), and still has a smallish asset base. At $3.9 billion in assets at the time of this writing, the fund could probably more than double in size until it started having trouble staying within its mandate. And its primary manager, James Barrow, is one of the best and most experienced managers Vanguard has to offer. According to Morningstar (I recommend you sign up for a free Morningstar account if you don’t already have one), the fund is in the top 18% of its category over the last 10 years.

Best International Stock Fund

And The Winner Is: International Explorer (VINEX) - Here’s an actively-managed small/mid-cap international fund cheaper than its index equivalent! International Explorer currently charges an expense ratio of just 0.42% compared to 0.55% for the Vanguard FTSE All-World ex US Small Cap Index Fund (VSFVX). It has only a slightly higher average market cap (~$1.2 billion vs ~$1 billion) as well, making it a viable, less costly alternative to the foreign small cap index fund. Oh yeah, and it’s performance numbers aren’t too bad either, although it has been by no means dominant in its category.

Best Bond Fund

And The Winner Is: Vanguard Inflation Protected Securities (VIPSX) - This one wasn’t even close. Thought this was an index fund? It’s not. But it is dirt cheap and many (including me) consider TIPS to be an important alternative asset class. Some experts even go so far as to recommend holding TIPS instead of nominal bonds rather than in addition to them. I don’t quite go that far, but I do highly recommend this fund.

Best Non-Core Fund

And The Winner Is: Vanguard Health Care (VGHCX) - I hesitate to recommend such a narrow sector fund here, but the Health Care fund has been pretty spectacular over the long term. Since opening in 1984, this fund has returned 16.30% per year. Yeah, plenty of that has to do with the fact that the health care sector has been on fire since then, but low expenses and a veteran management team certainly haven’t hurt. It goes without saying you should allocate only a very small percentage of your portfolio to any narrow sector fund, preferably no more than 5% (although 10% might be acceptable for some investors).

Best Balanced Fund

And The Winner Is: Vanguard Wellington Fund (VWELX) - Yes, Wellesley Income (VWINX) is a superb fund, but how could I not go with Wellington here? It’s one of the oldest and most respected mutual funds in existence. Since opening in 1929, Wellington fund has returned 8.12% per year. That record includes not only the latest economic collapse but also the Great Depression. Not bad, huh? Plenty of people have retired, sent their children to college, or otherwise gotten filthy rich investing for long periods of time only in Wellington fund. It embodies everything that’s right in the mutual fund world: extremely low costs, stable management, and a disciplined, conservative investment approach.

Best Alternative Asset Class Fund

And The Winner Is: Can I choose the Vanguard Inflation Protected Securities Fund (VIPSX) again for this category? Yes? Okay, then I choose that one. The Precious Metals And Mining Fund (VGPMX) comes in second.

Most of the statistics in this article were collected using Morningstar. Sign up for a free Morningstar account for access to a variety of portfolio tools and a plethora of information on almost any mutual fund or ETF in existence.

* All figures and numbers accurate as of the date of publication