The world’s best fund?

HINT: IT’S NOT AN INDEX FUND

Vanguard Opportunities Fund looks at the future earnings potential of companies it invests in.

Arecent chance encounter with Vanguard executives in New York added immensely to my investment repertoire. I raised the issue of Warren Buffett’s oft-repeated advice that most investors should buy the S&P 500 Index and be done with the rest. Vanguard Group founder Jack Bogle has also punted this.

My question of whether they all follow Buffett’s advice with their own money was met with a polite cough. It seems they mostly invest in a large global equity fund – the Vanguard US Opportunities Fund.

This fund’s beaten the S&P 500 index fund from day one since inception in 2002 by a mile. But it can’t publicise this; it might slow the fund inflow into its index fund.

Vanguard offers actively managed funds. In fact, over half its assets under management are still held in active funds.

I was blown away by the Vanguard Opportunities Fund’s massive outperformance against the index, and its peers. Since inception, this $2.4 billion investment fund has returned 15.5% pa (versus 8.2% pa); over 10 years 11.77% pa (6.32%); over five years 21.5% (14.5%), 15.12% (9%) over three and 28.8% (17%) over one year.

The fund managers look particularly at the future earnings potential of the companies they invest in, especially if that fact’s already in the share price. Most companies are in the US (94%) but it also searches for qualifying companies in Canada, China, Europe and emerging markets. No index fund replicates such a strategy.

Because it includes offshore companies in its fund, its benchmark is the Russell 3000 Index. It’s also cheap: costs are 0.9% per annum.

I compared the fund’s returns with those (USD and rands) over the last five years against the S&P 500 and the JSE Top 40 Index. This fund’s beaten the S&P 500 Index substantially. Against the JSE Top 40, it’s a brutal massacre.

I feel for investors who keep investing in underperforming funds/indices linked to our local stock market. Regulation 28 forces pension funds to invest at least 75% in the local market. That’s why the retirement dreams of many pensioners are crashing. There’s nothing big fund managers can do about it. They are at the mercy of the whims of Treasury.

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