The case for active investing with Vanguard Canada
Long-time readers of this site will know I accept a variety of ways to invest. Whether you invest in real estate, equity stock markets, focus on commodities, seek out alternative investments such as private lending, I believe some form of active investing can be helpful to help investors realize their goals.
To be clear though, this is not to say all wealth-building aspirations should pursue active investing strategies. The ongoing trend of low-cost, passively managed index investments has been nothing but good for investors and retail investors at large. Vanguard Canada has been leading the way on this front for some time now, and the Do-It-Yourself (DIY) investor community has been the beneficiary. With many of their funds, including all-in-one funds, such as the Vanguard Growth ETF Portfolio (VGRO), Vanguard All-Equity ETF Portfolio (VEQT), and even more recently, the Vanguard Retirement Income ETF Portfolio (VRIF), Canadians have access to one-stop shopping per se for both asset accumulation and decumulation needs. Essentially, any of these “asset allocation ETFs” can do all the heavy lifting for you and you can show the active money manager the door.
I wrote about these Vanguard Canada all-in-one ETFs in this previous post here.
The case for active investing – yes, it can work!
Many investors debate the merits of passive versus active investing. Passive investing has gained greater popularity over the years as investors pay greater attention to costs and the challenge of outperforming the market (it’s very difficult). Yet, if you can find an active strategy that is both low-cost and implements a globally diversified and long-term investing approach, there could be a case for it as part of your investment portfolio.
We all know by now the case for passive investing. For the most part, passive index investing makes sense – to ride market returns less minuscule money management fees to create and monitor the index fund. It is easy – it does not take much effort to oversee the performance of the index funds and re-balance the assets across your portfolio (if at all in the case of any asset allocation ETFs now available). Not to mention, the stats back up the effectiveness of passive investing over active investing with time. Less tinkering in your portfolio gives way to higher, overall returns. Finally, passive investing is also a great way to gain diversification.
In almost any case, an indexed Exchange Traded Fund (ETF) or indexed mutual fund is probably the better choice over a single security, with the hope of market-beating performance. However, I do firmly believe active investing can still play a role in any portfolio – and it’s an approach I employ myself with my selection of stocks to go along with my low-cost ETFs.
Before we share some highlights from some actively managed funds from Vanguard Canada to consider for your portfolio, here are two key reasons I believe there remains a case for active investing.
Indexing is more active than you think!
Let’s face it, if you just index the TSX in Canada, you’re basically making a big bet on Canadian financials and our energy sector for returns. Historically, these two sectors alone make up around 50% of the index.
Image courtesy of Vanguard Canada, VCN, July 2021.
Following the market-cap weighted index, while passive and likely highly successful long-term, this does not mean certain holdings in the index may not be undervalued, poised for higher returns to drive the index higher. A case in point was the strong emergence of Shopify (SHOP) in recent years.
Image courtesy of Google.
An active money manager can help exploit those securities and drive price discovery. After all, for passive investing to exist there must be active investors out there striving to figure out what assets are reasonably worth and how much they are willing to pay for future earnings.
There are degrees of active and passive investing
While there is no guarantee for selecting talented active money managers in the future, I do believe a healthy combination of quantitative and qualitative inputs can improve the average investor’s experience. While low-cost investing continues to lead the way, as a strong predictor of long-term investing success, investing in low-cost funds alone is likely not enough. Investing that aligns with your goals, helps you stay balanced as part of your risk/reward tolerance, and having the wherewithal to get out of your own way, are also huge factors in wealth-building success. In fact, investing in the right mix of equities and bonds based on your risk/reward tolerance could have a bigger impact than anything else you do. And, we know even with indexed funds, the most successful investors will be the ones who invest for the long term; they won’t tinker with their portfolios too much. Active investing and active money management can do that work for you as they monitor market trends.
The case for active investing with Vanguard Canada
As a worldwide investment management leader, managing some $60 billion of Vanguard assets for Canadians, Vanguard Canada continues to grow as one of the largest fund managers in the world, with a strong belief that active and passive/index-tracking funds can play a critical role in a well-diversified investment portfolio.
In fact, active investing at Vanguard is a huge part of their own portfolio – Vanguard manages over $1.7 trillion USD ($2.1 trillion CAD) in active funds. To put that in perspective, that trillion-dollar figure is more than the entire Mutual Fund industry in Canada.
Here are a few actively managed funds worth considering for your portfolio from Vanguard Canada, including my commentary on each.
|Vanguard Global Balanced Fund (VIC100)||Vanguard Global Balanced Fund seeks to provide long-term capital growth together with some current income by investing primarily in a combination of equity and fixed income securities from around the world. This globally balanced fund has a strategic mix of 35% fixed income and 65% equities. As of April 2021, this fund has a 5-star rating by Morningstar in its respective category. Actually, VIC100’s returns place it in the first quartile of its CIFSC Global Equity Balanced category since inception.||Since inception, on an annualized basis and after fees as of April 2021, Vanguard Global Balanced Fund (VIC100): +8.1%||· MER = 0.54%.|
· Quarterly distribution.
|Global Dividend Fund (VIC200)||Unlike the Global Balanced Fund above, this fund invests in higher dividend yielding securities across the globe. For the most part, the fund’s style has been out of favor for most of the time since inception as markets have preferred high growth companies that don’t pay dividends. However, past performance says little about the guarantee about the financial future, so the favour back to a dividend income strategy could likely occur again with time.||Since inception, on an annualized basis and after fees as of April 2021, Global Dividend Fund-Series F (VIC200): +4.1%|
Even with the fund’s style being out of favour of late, VIC200’s returns are in the first quartile of its Global Dividend category.
|· MER = 0.48%.|
· 12-month yield > 3.5%.
· Quarterly distribution.
|Windsor U.S. Value Fund (VIC300)||This fund is the sister fund per se to the Vanguard Windsor Fund, offered in the U.S. This 4-star fund has a track record going back to 1958. VIC300 offers exposure to U.S. large and mid-cap value stocks. As value fund, performance has roared back, the fund is in the first decile of the US Equity category in Canada YTD.||Since inception, on an annualized basis and after fees as of April 2021, Windsor U.S. Value Fund-Series F (VIC300): +9.7%||· MER = 0.54%.|
· 12-month yield > 4.2%.
· Annual distribution.
|International Growth Fund (VIC400)||The Vanguard International Growth Fund has been a top performing fund, thanks to exposure primarily outside of North America. It mirrors a fund of the same name offered to U.S. investors since 1981. The U.S. fund is also rated 5-stars by Morningstar. VIC400 has been in the top decile of funds in its category since inception and has outperformed its benchmark by over 11%.||Since inception, on an annualized basis and after fees as of April 2021, International Growth Fund-Series F (VIC400): +17.1%|
VIC400’s recent returns have been stellar. VIC400 has been in the top decile of funds in its category since inception and has outperformed its benchmark by over 11%.
|· MER = 0.58%|
· Annual distribution.
And a final interesting fact?
A unique feature to these funds is the fee waiver and pricing structure: that changes depending on the performance of the fund. These are some of the only mutual funds in Canada that while active, are aligned with investors’ needs in terms of performance versus price.
The case for active investing with Vanguard Canada summary
As Vanguard Canada has accurately claimed on their site, while “no one can control the markets” you can control how you invest and what you pay to invest in. Active investing and passive investing can live in portfolio harmony.
For all potential investors, in terms of where the products can be purchased for DIY investors, Questrade and Qtrade both offer the mutual funds.
When it comes to active vs. passive or anywhere in between, I believe investors do not need to be confined to just one investing approach or style, as long as the following four key investing principles remain top of mind:
- Determine your goals – have goals in mind when it comes to the investments that fit into your financial plan. That could be anything from saving and investing for retirement, to buying a home, or saving some money for a well-deserved vacation. Personal finance is personal. The only judgement on your goals should be yours!
- Determine your balance – investing in the right mix of stocks and bonds based on your investing risk/reward tolerance can be far more important than picking an index fund over an actively managed fund, or vice-versa. Don’t let other people including experts dictate what your comfort for investing risk or style, actually is.
- Keep your investing costs low – certainly keeping your money management fees low is a great predictor of potential investing success but making money from investments isn’t about predicting the future – since the future is not accurately predictable at all. Low-cost financial products will absolutely help your investment journey. That includes limiting any transaction costs or trading, jumping in and out of funds or securities. So, keeping fees low combined with broader, good financial behaviour is essential. Low cost, active money management can help that behaviour for you if you’re not ready for complete DIY investing.
- Keep your investing discipline over time – the biggest enemy we have when it comes to investing is the one we face in the mirror. Our emotions including portfolio reactions to market noise can be devastating to the wealth-building process. Simply put, the most successful investors are often those that have a disciplined approach to savings for retirement purposes and they don’t tinker with their portfolios – they stay invested all the time.
Whether your bias is passive investing only, a blend of passive and active investing, or more active investing than your neighbour, I personally believe as long as you keep those four investing principles top of mind, you have the potential to be financially wealthier for it.
I want to thank Vanguard Canada for their contributions to this sponsored post. All thoughts and opinions are my own.
What goes into a financial plan? I discuss those details with a Certified Financial Planner (CFP) here.
Curious how to generate retirement income? Read on here!