Are Vanguard's Managers Good Stock-Pickers or Style-Pickers?

Abstract

Jared Kizer's article in the Winter 2005 issue indicates for Vanguard's managed funds that the return to stock–picking skill is not enough to offset the additional transactions costs of a managed portfolio. Thus, the superior performance of Vanguard's managed portfolio was due entirely to its tendency to overweight small stocks and value stocks relative to the index portfolio during a period when stocks with these two characteristics outperformed the market. So, it is style–picking skill rather than stock–picking skill that leads to the superiority of the managed portfolio in this particular instance. Similarly, style–picking skill explains the lower risk for the managed portfolio.