An article in The Wall Street Journal contrasts passive and active stock investment strategies of the two members of the Bogle family. The father, John ‘Jack’ Bogle, practices the former approach

Jack Bogle is the founder of Vanguard Group and considered by many investors as the father of passive investing, or using funds that try to capture the return on an entire broad basket of securities, such as the S&P 500.

while the son, John Bogle Jr., prefers the latter one

The junior Mr. Bogle then started Bogle Investment Management LP, his current firm, in 1999. Like many active managers, he uses computer models to analyze earnings surprises, relative stock valuations, corporate accounting and the like.

Results have apparently been in favor of active management:

The flagship Bogle Small Cap Growth Fund was launched 14 years ago and has delivered an annualized return since then of 12.4%, compared with 8.6% for its benchmark index, the Russell 2000, according to Morningstar.

However, this statistic is misleading. As of the end of November 2013, the 10-year annualized return of the Bogle Small Cap Growth Fund (BOGLX) was 8.89%. The annualized return of the iShares Russell 2000 ETF (IWM), which follows the fund’s stated benchmark, was 9.01% in the same period. Moreover, the iShares Russell 2000 Growth ETF (IWO), implementing a benchmark more relevant to the fund, returned an annualized 9.19%.

The fund’s lifetime outperformance cited by the article is mostly due to the 1999-2000 period when small-cap growth stocks enjoyed a strong run-up during the technology market bubble. In its first year since inception on October 1, 1999, BOGLX returned about 69.9% compared to about 21% of the Russell 2000® index in the same period.

Let’s also take a look at the fund’s performance from the Alpholio™’s perspective. Here is a cumulative RealAlpha™ chart since early 2005:

Cumulative RealAlpha™ for BOGLX

The fund started to significantly underperform its reference portfolio of exchange-traded funds (ETFs) in mid-2007, well before the onset of the financial crisis. From mid-2008 to mid-2012, the fund’s cumulative RealAlpha™ was relatively flat. The fund began to outperform only about a year ago:

This year, John Bogle’s fund has generated total returns of 40%, through Tuesday, according to Morningstar, compared with 35% for the Russell 2000 and 34% for the similar Vanguard fund.

The following chart shows the percentage ETF weights in the fund’s reference portfolio over the same analysis period:

Reference Weights for BOGLX

Just three ETFs, iShares Russell 2000 Growth (IWO), Vanguard Small-Cap Growth (VBK), and iShares Morningstar Small-Cap (JKJ), collectively accounted for about 85% of the reference portfolio on average. This indicates that a substitution of the fund with a better-performing collection of alternative investments was relatively straightforward.

It looks like the elder Mr. Bogle was right after all — it is difficult for a stock picker to outperform on a truly risk-adjusted basis. To access more information on BOGLX, please register on our site.


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