• At Vanguard, we believe it’s the drivers of performance—rather than performance itself—that can help active managers succeed over the long term.
• We assess the stability of a manager’s firm, the quality and depth of its investment team as well as its philosophy and investment process.
• We partner with some of the industry’s most respected and forward-thinking investment teams as we look to deliver value to our investors over the long term. 

We’re able to focus on these drivers of long-term performance by taking a sub-advised approach to the management of our active equity funds, partnering with leading fund managers from around the world.

Vanguard is one of the world’s largest active managers, with more than $1.6 trillion in assets actively managed globally¹. Over the past 50 years, we have developed our distinct active management philosophy based on stability, experience and a focus on long-term, low-cost investing.

We aim to look past the noise of short-term performance and rigorously assess the stability of a manager’s firm, the quality and depth of its investment team and how enduring its philosophy and investment process are.

To do this, Vanguard’s global Oversight & Manager Search (O&MS) team is tasked with evaluating our existing active equity manager line up as well as looking for prospective managers with an active edge. It is dedicated to doing this as part of its wider due diligence programme for external managers.

Three key drivers of outperformance

Our approach is rooted in three factors which we believe are key to improving the probability of outperformance: patience, discipline and a long-term horizon.

Patience: more important than performance is that the drivers of performance remain in place over the long term. We typically have 20-30² partnerships with external fund managers, and we usually make between one and three manager changes each year, which equates to a 10% turnover rate given that the average tenure of our external manager relationships is 15 years³.

Discipline: we combine our insights on a firm and its investment team with a sophisticated analysis of a manager’s performance patterns and portfolio. This allows us to determine whether the management of the portfolio remains true to the manager’s stated investing style and if it can add value over the long term. This proactive approach lets us engage with them over years, not months, and over multiple interactions before hiring them.

Long-term investment horizon: knowing that long-term performance matters more than short-term not only benefits the manager and their relationship with Vanguard, but also clients who seek long-term stability and clarity.

How Vanguard identifies skilled active managers

The O&MS team incorporates four pillars of assessment when looking to identify skilled active managers: firm, people, philosophy and process. How stable is the firm? What is the calibre of its people, including the investment team and the portfolio manager? What inefficiency in the market is the team trying to take advantage of? How does the manager attempt to exploit opportunities and for how long has the team been investing this way?

The team is not looking for adherence to any single, predefined investment approach, and it values diversity of thought. The O&MS team’s assessments of external fund managers include how they gather information, how they structure their research efforts and the extent to which both qualitative and quantitative factors are considered in their analysis.

The objective of the O&MS team is not to be prescriptive and to tell a portfolio manager what they can buy or sell. It is about ensuring that they have done their due diligence. The team expects to hear their rationale for holding a stock and why they think its share price will grow over the long term.

The portfolio managers which manage Vanguard’s active equity funds have a wide range of investment approaches and areas of focus, from growth to value, large-cap to small-cap, and quantitative modelling to bottom-up fundamental stock research.

Thanks to our manager search and oversight process, we partner with some of the industry’s most respected and forward-thinking investment teams. By applying their unique perspectives to the portfolios they manage for Vanguard, they help to deliver value to our investors over the long term.

¹ Source: Vanguard, as at 31 December 2023.

² Source: Vanguard. We had 27 active partnerships as at 31 December 2023.

³ Source: Vanguard, as at 31 December 2023.