Low-cost fund leader Vanguard had another strong year in 2006, with 78% of its funds beating their peer-group averages. Over longer periods--three, five, and ten years--the percentage is even higher: more than 80%.
This performance, of course, has nothing to do with superior stock-picking and market timing--and everything to do with costs. The industry-wide average mutual fund expense ratio was 1.27% of assets in 2006. The average Vanguard fund expense ratio was 0.21%. Since 1975, moreover, Vanguard's average expense ratio has dropped to one-quarter of its original level--while the industry-wide average has risen. 
Given Vanguard's consistently strong performance, it is no wonder that it now manages more than $1 trillion of assets and is the second largest fund firm in the world. What is a wonder is why more fund companies haven't copied Vanguard's "secret formula."
Actually, it's not a wonder. Most other fund companies are for-profit corporations, many of them publicly held. For-profit corporations, especially publicly-owned ones, have impatient shareholders to please. And for impatient shareholders, even a three-to-five year time horizon is eternity.
It says that 80% beat the Lipper average. How exactly is that average computed? Is it literally the mean total return of all funds in a given category?
If so, it could be skewed by a handful of funds with extremely strong or poor performance, no?
Wouldn't it be good to know how many they actually beat?
Posted by: lommy | April 06, 2007 at 10:44 PM
A fair point. The statistic they cite leaves a lot of questions un-answered. Ideally, what you would want to know is the percentage of peer funds that each Vanguard fund beat in each period.
Based on other data I've seen, I suspect that the percentages are similar--that most Vanguard funds finish in the top quartile--but the statistic they've cited certainly doesn't prove that.
Posted by: Henry Blodget | April 07, 2007 at 09:23 AM