Last week, Vanguard, the Pennsylvania-based mutual fund complex long known as the king of the indexing hill (not to mention the house that Jack Bogle built), made some news: Chicago-based fund researcher Morningstar reported that Gus Sauter -- the longtime manager of such benchmark-tracking stalwarts as Vanguard 500 Index (FUND:VFINX) and Vanguard Total Stock Market (FUND:VTSMX) -- had stepped down as the day-to-day manager of those funds, among others. The move is presumably designed to give Sauter more time to focus on his duties as the shop's chief investment officer, a position he's held since 2003.
To be sure, 500 Index and Total Stock Market -- both of which focus on large-cap titans such as Intel (NASDAQ:INTC), IBM (NYSE:IBM), Verizon (NYSE:VZ), and Home Depot (NYSE:HD) -- are among the industry's behemoths, boasting a collective asset base of roughly $160 billion. But should investors in either of them -- myself included -- care? I mean, these are passively managed index funds, right? So what's the big whoop?
Passive-aggressive
Well, the big whoop is that, as passive managers go, Sauter has actually been pretty aggressive. He's worked hard and effectively over the years to offset his funds' expense ratios by, among other strategies, investing incoming assets quickly, clamping down on trading costs, and making advantageous use of S&P futures.
Index investing is a game of centimeters, of course, but the results he's garnered have been most impressive: Despite its price tag of 18 basis points (0.18%), for example, the 500 Index fund has lost to its expense-free benchmark by just five annualized basis points (0.05%) for the 10 years ended April 30.
That's a better mark than that of the even lower-cost Spiders ETF (AMEX:SPY), and in the world of index investing, Sauter's track record is big news indeed -- as well it should be.
Making up ground
Still, that particular tidbit illustrates one of the main ideas behind my Champion Funds newsletter service: Investing only in index funds means always having to say you're sorry. Indeed, while a seriously talented manager like Sauter has managed to make up considerable ground, he, too, has lost to the S&P over time.
And let's not even discuss the plight of index investors in funds with higher price tags and less savvy management. OK, let's do: By and large, the most those unfortunate souls can reasonably hope is that their funds will lag the market each year by about the amount of their annual expenses. Oh, boy!
It's not either/or
The good news, however, is that no one has to be an index-only investor -- and I'd argue that no one should be, either. While it's true that the typical mutual fund loses out to the S&P over time, there are two points that, as the Fool's resident fund geek, I like to make early and often: First, no one ever said you had to invest in the typical fund. And second, there have certainly been periods when even the merely average actively managed fund has surpassed the market. Indeed, that's precisely what's happened over the past five years.
With those facts in mind, our focus in Champion Funds is on choice index mutual funds and ETFs as well as -- and primarily -- on those actively managed funds that have what it takes to beat the market over the next three to five years and beyond. We've been up and running for a little over a year now, and so far so good. (Click here to take a free trial and make your own judgment.)
Bad rap
Mutual funds get a bad rap in some quarters, but the fact remains that more than 90 million of us invest in them -- and for good reason, too. Well-chosen funds -- i.e., those with low price tags, sensible strategies, and talented managers with track records of success -- provide high-quality exposure to the stock market along with the kind of diversification that can help smooth your ride to retirement.
Beyond that, most of us, after all, aren't stock jocks. Indeed, I'd be curious to know just how those folks who do consider themselves stock jocks have fared against the likes of Championship-quality fund managers -- among whom I most certainly number Vanguard's Sauter.
Speaking of whom.
I don't suspect much will change at his charges -- why would Vanguard mess with his success? Nonetheless, the occasion of Sauter's moving on provides a choice opportunity to give a tip of the jester's cap to one of the indexing world's true Champs -- thanks, Gus! -- and to remember that, when it comes to mutual funds, index picks aren't the only Foolish option.
Shannon Zimmerman, chief analyst for Motley Fool Champion Funds, is a fund fan of long-standing. He owns shares of Vanguard Total Stock Market. The Motley Fool is investors writingfor investors. Fool disclosure rules are here.
