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)
|Windsor II fund||16.5%||10.61%||$27406.80||$4522.12|
|Long term investment|
|Short term investment|
|Morgan growth fund||7%||9.02%||$23723.74||$1660.66|
|US growth fund||7%||2.88%||$13283.39||$929.83|
|International growth fund||6%||7.68%||$20965.00||$1257.90|
|International value fund||6%||8.72%||$23082.00||$1384.92|
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.