http://www.marketwatch.com/story/best-target-date-funds-fidelity-vs-vanguard-2015-04-15"That means shareholders pay Fidelity $500 million a year to manage $84 billion. Vanguard shareholders, on the other hand, pay the company only $138 million to manage $82 billion in funds with similar asset allocations and levels of risk."
"An obvious question: Do Fidelity shareholders get extra value for the extra money they pay. The obvious answer is no; in fact, it's just the opposite."
Comments
Simply put, Fidelity charges more on average for the same type of product. Yes, fees are very important when shopping for these kinds of funds. That is the crux of the story without the misadventure of writing Marketwatch is good at.
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From the article: "Why are Fidelity expenses more than three times as high as Vanguard's ... First, Fidelity pays active fund managers to try to beat the market."
Not so fast .....
Let's overlook the fact that these are most likely team-managed (despite having a single "lead" manager).
Let's also overlook that you are buying into the research/analytical capabilities, often global, these companies possess. A manager is only as good as the research and analysis underlying him/her. That's especially important when you consider the wide breadth of investments held by these funds.
Let's also overlook that you are buying into a corporate "culture" whose assessment of risk and treatment of clients will vary. The first directly affects the returns available from these funds as well as the potential losses you may incur.
Returning to fees. Remember that the mix of assets held greatly impacts the fees a fund must charge to recover its costs. One invested heavily in plain-vanilla government bonds and equity indexes can charge substantially less than one with substantial allocations to high yield debt and international and EM stocks and bonds.
Aside from the above, it's a great article.
(To John's point - sometimes Fidelity does not charge more for the same product; they generally match Vanguard in the index arena.)
There are still a couple of differences though, that Hank alluded to: the glide path of Fidelity funds (whether these index ones, or the ones Merriman chose to use as straw men) continue changing until 15 years past their target date (i.e. you still need growth past age 65). Vanguard's settle into a sleepy 30/70 (stock/bond) split just five years after retirement.
Then there is the breadth of assets employed. Even these "boring" Fidelity index target funds use TIPs and commodities. (The actively managed Fidelity target funds go further) And still they do this with the same ER. (To be fair, Vanguard adds international bonds, albeit hedged.)
The Merriman article is yet another devastating indictment of the futility and failures of active fund management.
Once again, passively managed funds bury equivalent actively managed funds in the annual returns dust; not always, but perhaps 20% to 40% of the time. The current condemnation is more impressive since it is an honest attempt to fairly contrast two giants in the industry on an even apples-to-apples comparison.
Focused analyses of this type should sound a wakeup alarm to active fund holders. It does not. It is further evidence of the high cost handicap that active fund managers typically can not overcome.
As MFOer Hank correctly highlights, Fidelity employs smart, dedicated fund managers who are supported by an aggressive corporate philosophy and a huge research budget. They do religiously search for superior investment options.
But the bottom-line test is if this extraordinary effort finds its way to bottom-line excess annual returns. The Merriman study says No.
Undoubtedly, Fidelity uncovered some superior investment opportunities that delivered excess rewards, but not a sufficient number to override the costs deployed in the discovery process itself. Net, net, Fidelity is playing a Losers game relative to the Vanguard team’s Winners game.
Just compare the annual return differentials between similar Vanguard and Fidelity products. Typically, Fidelity falls behind by a little more than their respective cost differentials. That observation surprised me. This outcome suggests that Fidelity not only could not recover their research and trading costs, but they added to their embarrassment by making bad trading decisions overall.
In the investment universe, the biggest winner is frequently not the smartest player. More often, he is the most patient player. Markets rapidly change and active fund mangers are challenged to quickly recognize, adjust, and adapt. It’s a tough assignment.
The market’s rapid changes are nicely summarized by visual Periodic Table of Style Rotations charts. Many such representations are accessible to all investors. Here is a Link to an American Century Investments version for both stocks and bonds:
https://ipro.americancentury.com/content/dam/americancentury/ipro/pdfs/flyer/Periodic_Table.pdf
That’s my value added contribution to MFO readers. There are plenty of alternate presentations telling the same story.
These Periodic Tables always display a random-like character. It’s chaos; good luck on trying to project future trends. Persistence is nonexistent. Yet active investors try, and try, and try, and mostly fail, and fail, and fail with an exceptional lucky gamble.
By way of full disclosure, I own both Fidelity and Vanguard products. I am shifting most of these holdings into Vanguard Index positions, but I do plan to keep a couple of Fidelity actively managed funds. They have served me well for decades. I plan to keep a few Vanguard active fund products also. I don't own any Target Date funds anywhere.
Thanks for your time.
Best Regards.
When I alluded earlier to terms like "research/analytical capabilities" and "corporate culture" I had in mind only that target date funds usually allocate widely across various asset classes and geographic areas. To an extent, management attempts to "overweight" or "underweight" different asset classes and geopolitical areas based upon its readings of relative valuations.
Now, you can say "To hell with that. All index all the time." if you want. To do so, however, is to say that no knowledge exists in any corner of the investment universe. Citadel gains nothing by hiring Ben Bernanke. Franklin Templeton's Mark Möbius provides no benefit to the firm's global allocation strategies, and the praises often bestowed on T. Rowe Price for it ability to identify the more attractive segments of the domestic and international stock and fixed income markets are, in fact, sorely misplaced.
Have it your way.
I didn't need to reach very far to open the long standing active-passive debate. Given the Fidelity and the Vanguard corporate cultures, that is a natural development.
As I mentioned, I don't own any Target Date fund products so I'm not familiar with the portfolios of the referenced funds. Merriman's text provided the comparison entry point as follows from the article:
" . . . Fidelity pays active fund managers to try to beat the market. These are bright, expensive employees whose compensation burdens the expense ratio of every fund except index funds. Vanguard funds have managers, of course, but their job is much simpler: To follow indexes."
I agree completely with Hank that the industry has some super successful fund managers and fund organizations. Fidelity surely has a few, and Vanguard hires some Alpha generating active management firms. More power to them and more profits to us if we choose wisely.
Best Wishes.
Here's M*'s column on the matter, noting that for a decade the fund "attempted to boost its returns by holding a higher percentage of short-term corporate bonds and asset-backed securities and fewer short-term Treasuries than did its index." Emphasis added.
You can also find the Vanguard quote in a M* discussion thread here:
http://socialize.morningstar.com/NewSocialize/forums/t/69530.aspx
Thank you so much for your informative comments.
Until today, I considered Vanguard the nearly perfect Indexer. I fully understand that they offer a mix of both actively and passively managed mutual fund products to capture market share. Income is a pervasive incentive. But I still thought of Vanguard as the nearly pure gold standard for Index products.
Your posting has prompted me to reassess my judgment. Your contribution documents that Vanguard is not as pure as I imagined. Things change. I had become lazy and began to trust without verification. That’s a potentially dangerous violation of a long established axiom for conducting relationships and business.
I was totally unaware of Vanguard’s changing policy driven by their bond shortfall issues. Has this move towards a more active portfolio management style migrated into other funds within the extensive Vanguard Index product line? Further complicating the matter, the delineation between active and passive investing often gets blurred with highly charged emotional arguments and definition details.
I wonder how Vanguard’s fund tracking errors have changed over time? I also wonder what Jack Bogle thinks of the current management policies and overarching strategies?
Some of this is a little bit of scary stuff for investors seeking Index market positions. Lots of questions to explore.
Thanks again for your timely post.
Best Wishes.
But it was enough to provide an existence proof that even for Vanguard, things are not always as they may appear. Sort of like 7-Up advertising: "Caffeine, never had it, never will" and then putting out a caffeinated 7-Up Gold. No caffeine since, but I still make a point of always checking the label.
http://www.nytimes.com/1989/02/11/business/7-up-gold-the-failure-of-a-can-t-lose-plan.html
1983 commercial - 7Up - No Caffeine - Geoffrey Holder
You noted that you are moving monies from Fidelity to Vanguard to take some type of advantage with the Vanguard offerings, yes?
Will you please clarify the advantage of this switch?
Thank you.
Catch
I am consolidating more of my portfolio in Vanguard products, but I plan to retain two active Fidelity positions. I will invest most of the transfers in Index funds, but some in actively managed Balanced funds,
My reasons are very conventional, the usual suspects: cost control, an attractive array of Index products for diversification, some risk management, and comfort with the institution and its execution history. No great surprises; I'm a simple investor with simple goals.
My wife is intimately familiar with and concurs with my plans and targets. That makes for easy decisions. I try not to ever mention specific funds since each MFOer marches to a different drumbeat and a different goal.
Best Wishes.
From the Vanguard excerpt you provided: "... one of the principal differences between the (index) funds and their indexes resulted from a decision by our portfolio managers and analysts to overweight the telecommunications sector ..."
I've heard of "Closet Indexers" before. This appears to be the reverse.
Isn't that also how DFA gets away with claiming their funds are not index funds? Something along the lines of: we follow the index except when we don't (e.g. for ease of trading).
Excerpt:
But Fidelity, which has the larger share of assets, charges its target-date customers considerably more — and therefore (predictably) offers considerably less.
The reason for this disparity is really quite simple, and there's nothing hidden about it.
You can argue about this six ways to Sunday, but the laws of mathematics prevail: In mutual funds with nearly identical portfolios, the shareholders who pay higher costs inevitably receive lower returns.
In a nutshell, Fidelity's target-date fund shareholders pay considerably higher expenses than the shareholders in Vanguard's target-date funds. Vanguard shareholders get higher returns.
Huh? I need one sentence to tell me they charge more. I get it. I know A > B. Oh wait, I forgot about the writing quota Merriman has to fulfil. First sentence says Fidelity has more assets and charges more. Then we start with "reason for this disparity". I'm thinking an explanation is forthcoming. I'm still waiting. There is one random statement not wrong that talks about expenses vs return. Okay. Then repeating a conclusion "in a nutshell", really? You already said it a much nuttier shell earlier.
But Merriman, who has the larger share of literary tripe, charges his financial pron readers considerably more - and therefore (predictably) offers considerably less.
The reason for this disparity is really quite simple, and there's nothing hidden about it.
You can argue about this six ways to Sunday, but the laws of mathematics prevail: In financial pron with nearly identical lack of intellectual nuance, the readers who spend more of their time reading inevitably receive lower gratification.
In a nutshell, Merriman's financial pron readers waste considerable additional time than the readers of Jaffy's financial pron. Jaffy's readers get more gratification.
In your individual accounts IRAs or Brokerage Vanguard has better choices,
Don't use Fidelity so don't comment or care... better options
To your point about not caring. Agree there are better options, but there are still a couple reasons to care. First, a good number of your fellow citizens lacking your knowledge are being "herded" into these products by their workplace plan administrators. I assume you care some for your fellow citizens?
Second, we can learn quite a bit about investing as well as how different fund companies think based on how they operate these funds. The "glide-path" each establishes represents an attempt to balance the risks inherent in investing against the need for younger workers to grow their assets. These "optimum" allocations by age vary significantly from company to company. It's noteworthy, for instance, that T. Rowe Price is generally one of the more aggressive in the degree of risk they consider appropriate at various ages. Also noteworthy is that Price determined a need to add a real-asset fund to their target-date mix only recently. And the type and duration of bonds selected for these funds in this low-rate environment must surely be of interest.
So, there are reasons to care.
So :" do what you do with what you do best " tampabay........think about it...deep