VPMAX vs VTSAX: Why This Hidden Vanguard Gem Might Be Your Portfolio’s Secret Weapon

As someone who’s been on the FIRE (Financial Independence, Retire Early) journey for years, I’ve learned that simplicity and low costs are key to building wealth. Like many in the FIRE community, I’ve long been a fan of Vanguard funds. But while most FIRE enthusiasts swear by VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares), I’ve found a hidden gem that’s been outperforming it for years: VPMAX (Vanguard PRIMECAP Fund Admiral Shares).

In this post, I’ll take you on a deep dive into why VPMAX has become my favorite mutual fund and how it stacks up against the beloved VTSAX. Whether you’re a seasoned investor or just starting out, this comparison will give you valuable insights to consider for your own portfolio.

The Tale of Two Funds: VPMAX vs VTSAX

Let’s start with a quick overview of our contenders:

1. VTSAX: The darling of the FIRE community, this index fund aims to replicate the performance of the entire U.S. stock market.
2. VPMAX: An actively managed fund that seeks to outperform the market by investing in carefully selected companies.

Now, I know what you’re thinking: “Active management? Isn’t that a no-no in the FIRE world?” Usually, yes. But VPMAX is not your typical actively managed fund, and that’s what makes it so intriguing.

Performance Showdown: David vs Goliath

Let’s cut to the chase: how do these funds stack up in terms of returns? Here’s a quick comparison:

These numbers might not seem like a huge difference, but let’s put them in perspective. If you had invested $10,000 in each fund in 2002, in 10 years:

• VPMAX would have grown to $72,357
• VTSAX would have grown to $54,569

That’s a difference of $17,788! Not too shabby for choosing the road less traveled.

Link to calculations.

Beyond the Numbers: What Makes VPMAX Special?

1. Downside Protection: VPMAX has historically performed better during market downturns, offering a smoother ride for your portfolio.
2. Sector Focus: While VTSAX covers the entire market, VPMAX concentrates on sectors like healthcare and technology, which have been driving much of the market’s growth.
3. International Exposure: VPMAX has about 15% international allocation, compared to VTSAX’s less than 1%. This gives you some global diversification without needing a separate international fund.
4. Ethical Considerations: As an actively managed fund, VPMAX can be more selective about the companies it invests in. For example, it doesn’t include certain controversial pharmaceutical companies that some investors prefer to avoid.

The Cost of Active Management

Now, let’s address the elephant in the room: fees. As an actively managed fund, VPMAX does have a higher expense ratio:

• VPMAX: 0.31%
• VTSAX: 0.04%

While this difference might seem significant, remember that VPMAX’s returns are reported after fees. So even with the higher costs, it has still managed to outperform VTSAX over the long term.

Turnover Ratio: A Key Metric You Shouldn’t Ignore

When comparing mutual funds, one often-overlooked metric is the turnover ratio. This seemingly simple number can tell you a lot about a fund’s strategy and potential tax implications. Let’s dive into what turnover ratio means and how VPMAX and VTSAX stack up.

What is Turnover Ratio?

The turnover ratio represents the percentage of a mutual fund’s holdings that have changed over the past year. In simpler terms, it’s how often the fund managers are buying and selling stocks within the fund.

For example, a turnover ratio of 100% means that all of the fund’s holdings have been replaced in the past year. A lower turnover ratio indicates a more “buy-and-hold” strategy.

VPMAX vs VTSAX: A Surprising Similarity

Here’s where things get interesting:

• VPMAX Turnover Ratio: 5%
• VTSAX Turnover Ratio: 4%

You might be surprised to see how close these numbers are, given that VPMAX is an actively managed fund and VTSAX is an index fund. Let’s break down what this means.

The Significance of Low Turnover

1. Cost Efficiency: Lower turnover typically means lower trading costs for the fund, which can translate to better returns for investors.
2. Tax Efficiency: Fewer trades mean fewer taxable events. This is particularly important for investors holding these funds in taxable accounts.
3. Long-Term Focus: A low turnover ratio suggests that fund managers are taking a long-term view of their investments, rather than trying to time the market or chase short-term gains.

VPMAX: Actively Passive?

VPMAX’s 5% turnover ratio is remarkably low for an actively managed fund. Many active funds have turnover ratios of 50% or higher. This low turnover suggests that VPMAX’s managers are:

1. Confident in their stock picks
2. Patient with their investments
3. Not prone to overreacting to market fluctuations

In essence, VPMAX is behaving more like a “buy-and-hold” index fund than a typical active fund. This approach can lead to better tax efficiency and potentially lower costs.

VTSAX: The Benchmark of Stability

VTSAX’s 4% turnover is exactly what you’d expect from a total market index fund. It only changes holdings when companies enter or leave the index, or when it needs to rebalance to match the market’s composition.

This ultra-low turnover is one of the reasons why index funds like VTSAX are often recommended for their tax efficiency and low costs.

The Vanguard Advantage

The similarity in turnover ratios between VPMAX and VTSAX showcases a key Vanguard philosophy: long-term, low-cost investing. Even in their actively managed funds, Vanguard tends to favor a patient, low-turnover approach.

This is where Vanguard’s unique ownership structure shines. As a company owned by its funds, which are in turn owned by shareholders, Vanguard is incentivized to keep costs low and act in the long-term interests of its investors.

What This Means for You

As an investor, the low turnover ratios of both VPMAX and VTSAX are good news:

1. Tax Efficiency: Both funds are likely to be tax-efficient choices for taxable accounts (though always consult with a tax professional for your specific situation).
2. Lower Costs: Low turnover typically translates to lower overall fund expenses.
3. Long-Term Focus: Both funds align well with a buy-and-hold, long-term investment strategy.

While turnover ratio shouldn’t be the only factor you consider when choosing a fund, it’s an important piece of the puzzle. The surprisingly similar and low turnover ratios of VPMAX and VTSAX demonstrate that sometimes, active management can look a lot like passive management, and that can be a very good thing for investors.

Inside the Minds of VPMAX’s Fund Managers

One of the most enlightening experiences in my investment journey was attending a presentation by VPMAX’s fund advisors before I left my corporate career. This rare glimpse into the minds behind the fund solidified my confidence in VPMAX as a long-term investment. Here’s what stood out:

A Deep Dive into Management Strategy

The fund managers laid out their investment strategy with impressive clarity. Unlike many active managers who chase short-term gains, VPMAX’s team emphasized their commitment to a long-term approach. They look for companies with strong fundamentals and potential for sustained growth over years, not just quarters.

What struck me was their patience. They’re not afraid to hold onto a stock during temporary downturns if they believe in the company’s long-term prospects. This approach aligns perfectly with my own investment philosophy of “time in the market” over “timing the market.”

Rigorous Research Process

The depth of research behind each investment decision was eye-opening. The team doesn’t just rely on financial statements and market trends. They conduct extensive industry analysis, meet with company management, and even talk to customers and suppliers to get a 360-degree view of a potential investment.

This level of due diligence gives me confidence that each company in VPMAX’s portfolio has been thoroughly vetted. It’s like having a team of professional analysts working for you, diving deep into companies in a way that individual investors simply can’t.

Multiple Perspectives, One Goal

One unique aspect of VPMAX’s management is its multi-manager approach. Instead of relying on a single fund manager, VPMAX employs several portfolio managers who independently oversee different portions of the fund.

This structure offers two key advantages:

1. Diverse Perspectives: Each manager brings their own expertise and viewpoint, leading to a well-rounded portfolio that isn’t overly reliant on a single investment thesis.
2. Risk Mitigation: The multi-manager approach helps prevent any single manager’s biases or mistakes from significantly impacting the entire fund.

The Human Element

Perhaps the most impactful aspect of the presentation was seeing the human side of fund management. These weren’t just number-crunchers; they were passionate investors with a genuine excitement for the companies they invest in.

Their enthusiasm was contagious, and I left the presentation feeling like a partner in the investment process rather than just a faceless shareholder.

The Takeaway

Attending this presentation reinforced my decision to make VPMAX a significant part of my portfolio. It showcased a level of thoughtfulness and long-term thinking that’s rare in the world of active management.

While past performance doesn’t guarantee future results, understanding the philosophy and process behind VPMAX’s success gives me confidence in its potential for continued strong performance. It’s as close as I want to get to individual stock picking, with the added benefit of professional management and diversification.

Is VPMAX Right for You?

While VPMAX has been a winner for me, it might not be the right choice for everyone. Here are some factors to consider:

1. Investment Amount: VPMAX has a higher minimum investment and was previously only available to Vanguard Flagship clients (those with $1 million+ invested).
2. Tax Considerations: VPMAX distributes capital gains annually, making it better suited for tax-advantaged accounts like IRAs.
3. Risk Tolerance: While it has performed well historically, VPMAX is more concentrated than VTSAX and could be more volatile.
4. Investment Philosophy: If you’re a die-hard index fund believer, VPMAX’s active management approach might not align with your strategy.

The Bottom Line: Diversification is Key

In my portfolio, VPMAX makes up about 28% of my investments. It’s a significant portion, but I still believe in diversification. I combine it with other index funds to create a well-rounded portfolio that aligns with my goals and risk tolerance.

Remember, investing is personal. What works for me might not work for you. The key is to understand your options, do your research, and make informed decisions based on your unique situation and goals.

Whether you stick with VTSAX, give VPMAX a try, or find another fund that speaks to you, the most important thing is to start investing and stay consistent. Your future self will thank you!

What’s your take on VPMAX vs VTSAX? Do you have a favorite fund in your portfolio? Let me know in the comments below!

Disclaimer: This post is for informational purposes only and should not be considered financial advice. Always do your own research and consult with a financial professional before making investment decisions.