One of the biggest arguments against active management has been the cost to clients.
Vanguard, which is known for passive investing or investing in index funds, does however have some active stock funds.
In a Q&A with Sean Hagerty, head of Vanguard’s portfolio review department, Daniel Wallick, principal of its investment strategy group, says the key to active outperformance, is cost.
“So we’ve done some studies on cost, and low cost is the only thing that we can identify ahead of time to help us target a potentially successful manager. It’s the only quantitative tool we have in our arsenal to sort of identify potentially useful managers, but that alone can’t get us there, right? So the other thing that’s very useful, is you have to be able to identify talent. So it’s some combination of both of those.
“That said, cost is the most certain thing you know when you purchase a security. Right, it’s the only known when you actually purchase a security. You know how much it costs. Everything else is a to-be-determined function in the future. So that’s why low cost is really, really a crucial function to whatever investment you have but particularly when we’re talking about active management. That’s why low-cost active is really the function that needs to be incorporated by investors.”
Wallick goes on to say that the lowest-cost funds always perform better than higher-cost funds.
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