Wednesday, May 10, 2006

Vanguard STAR Fund Performance Analysis

Studies have shown that the asset allocation among various asset classes is very important for the investment success. Investors can allocate assets themselves by buying individual stocks, bonds, and mutual funds or they can choose various balanced/hybrid types of investment instruments, which allocate the assets for the investors.

I like balanced funds. I believe that the balanced funds let investors do, often preached but seldom achieved ‘buy low and sell high’. When an average investor invests in the market, most of the times the portfolio looks like ‘bought high and sold low’ or ‘bought high and holding low’.

By their design and objective, the balanced funds have to invest new money in the recently underperforming securities. The balanced funds have to sell the recently outperforming securities when it is time to sell.

The vanguard STAR fund is a balanced fund. This is the only fund in the Vanguard fund family with a lower initial minimum investment of $1,000. The STAR fund allocates the assets into other underlying Vanguard funds in fixed proportions. The following is the target allocation of the STAR fund into other Vanguard funds:

  • 16.5% in Windsor II fund
  • 12.5% in Long term investment grade fund
  • 12.5% in GNMA fund
  • 12.5% in Short term investment grade fund
  • 9% in Windsor fund
  • 7% in PRIMECAP fund
  • 7% in Morgan growth fund
  • 7% in US growth fund
  • 6% in International growth fund
  • 6% in International value fund
  • 4% in Explorer fund

The table below lists the 10-year performance of the 11 funds that make up the Vanguard STAR fund. By doing simple math, I show that the whole is greater than the sum of its parts with the STAR fund. In other words, the total return of the Vanguard STAR fund was higher than the sum of individual returns of these 11 underlying funds. To be even more clear, the investor X, who invested $10,000 in the Vanguard STAR fund 10-years ago will be ahead of the investor Y, who invested his $10,000 by buying 11 funds individually in the above proportions. ($1,650 in Windsor II fund, $1,250 in Long term investment grade fund, ……, $400 in Explorer fund)

Fund NameAllocation
Windsor II fund16.5%10.61%$27406.80$4522.12
Long term investment
grade fund
GNMA fund12.5%6.16%$18186.80$2273.35
Short term investment
grade fund
Windsor fund9%10.27%$26577.00$2391.93
PRIMECAP fund7%13.23%$34632.84$2424.29
Morgan growth fund7%9.02%$23723.74$1660.66
US growth fund7%2.88%$13283.39$929.83
International growth fund6%7.68%$20965.00$1257.90
International value fund6%8.72%$23082.00$1384.92
Explorer fund4%10.54%$27230.00$1089.20

You can see from the totals line in the table that the investor Y earned $22,516.63 by allocating assets himself in the underlying funds. Now hear comes the fun part, the investor X who invested $10,000 directly into the STAR fund had $24,937.58 at the end of the 10-year period. The STAR fund earned $2,420.95 more for the investor X.


I believe, the STAR fund benefited from the balanced strategy, which forced the manager to buy the underperforming underlying fund, and thus earned excess return.

Note: All performance data is as of 4/30/2006 and was retrieved from the Vanguard website.


Anonymous said...

Incorrect calculation. You used end point weights for each of the funds and calculated the returns. Vanguard kept changing allocations over the years and you need to include this factor in your calculations.

Anonymous said...

To invest in a fund that goes and invest in other funds, doesn't this effectively double the fees you are paying?

Anonymous said...

I belive the fund-of-funds from Vanguard do not charge any additional expenses on top of the expenses charged by the underlying funds.

Anonymous said...

I have personally invested $10,000 in the Vanguard STAR Fund and this is probably the best investment I have made yet. By the way, DO NOT use financial planners, they do nothing and they get a fat check for setting on their rumps, keep the money you have earned and invested, go through, they have a .1% of fees, not 5-15% for any financial planner, thats at most 14.9% more money that you are saving. Just think about this and dp the right thing.

Anonymous said...

Your comments indicate you should pay the 1-3% for the wisdom and direction a professional financial planner can provide. Not sure who you paid that much too or where you get your fact, but my advisor charges me 1% and I have never felt this wasn't justified. She provides me with information, education, and a non-emotional perspective. I am very happy paying her the 1% if it keeps me from making the split decisions that would have lost me money in the end numerous times. You're right though, if you don't want to pay for guidance you shouldn't hire one. I prefer not paying for funds twice personally.

Sherry said...

I just exchanged $2,000 of my current Vanguard funds into the STAR Fund. Thank you all for your insights.

Anonymous said...

"performance data as of 4/30/2006" is out the window...I am trying to plan my 2008 IRA is 2/8/09....please update the performance information for 4th quarter 2008...please include the companies you are investing in...

i have to wonder if further investment in STAR might b e in defunct companies which have zeroed out & have no chance of recovery..I am trying to maintain the faith in "dollar cost averaging" but I need some information on the companies STAR is invested in so that I can make a decision about this soon..DEBO

Anonymous said...

if you do not know what to do with your money- put in in the STAR FUND. you will get a very decent return- you do not need to pay anyone to manage your money ( unless your are a multi millionaire) put $500-1000 month starting at age 30 and by age 50 you will have some real money. now is a great time to buy !!!

Anonymous said...

"if you do not know what to do with your money- put in in the STAR FUND.You will get a very decent return- you do not need to pay anyone to manage your money"

Really? then how do they manage our money then?