Among the reasons are diversity of thought, access to a range of talented managers, and potentially less volatile performance than a single manager fund.

Still there’s plenty of skepticism of the multi-manager model. Are such funds too similar to the indexes they hope to beat? Or could having multiple managers water down the best performer while layering on fund costs? Vanguard’s research determined these assumptions were largely unfounded.

Are they closet indexers?

Investors who seek actively managed funds for the opportunity to beat a benchmark index aren’t looking for a fund that mirrors benchmarks so closely that they’re unlikely to produce meaningful outperformance. That’s especially the case considering the higher fees generally associated with active funds.

However, a comparison of the number of holdings in a multi-manager fund to its respective benchmark shows that they’re not synonymous with “closet index” funds. For example, the benchmark index of the Vanguard International Growth Fund at the end of March, 2016 contained 1,848 stocks from developed and emerging markets outside the United States. The fund’s three managers, in contrast, held a combined total of 169 stocks—less than 10% of the benchmark’s total.

Are there too many cooks?

Daniel Wallick
Daniel Wallick
Another criticism sometimes leveled against multi-manager funds is that the performance of a fund’s best manager gets diluted. Why not just have the top manager run the whole fund? As Daniel Wallick of Vanguard Investment Strategy Group pointed out, even successful managers can have significant and sometimes extended periods of underperformance along the way to long-term success.”Some people believe that if they invest with one good fund manager, the fund will consistently outpace its benchmark year after year,” he said. “But that just doesn’t happen. Theroad to long-term outperformance is bumpy. So if you accept that even good managers will underperform at times, then it can make sense to layer on managers with different but complementary investment strategies to help smooth the ride.”  

Fees aren’t necessarily higher

As a Vanguard client, you’ve probably heard us talk about the importance of keeping investment costs low, which helps put more of what your investments earn in your pocket. Multi-manager funds obviously have more than one manager to compensate, but each firm is generally paid based on the dollar amount of assets it manages. So these funds do not necessarily pay more in management fees than similar-size active funds. Vanguard’s average active fund expense ratio is 0.27% compared to the industry average of 1.04%.1

The proof is in the performance

The solid track record of our multi-manager funds over long periods shows that two heads, and perhaps more, can be better than one. All 12 of our equity funds that have been multi-managed over the past decade have outpaced the average annual return of their peer groups over that period ended March 31, 2016.2

Although considerable research shows that the odds of outperformance for actively managed stock funds are long, Vanguard’s multi-manager stock funds have done better. For the decade, 58% of our multi-manager stock funds surpassed their benchmark averages, helped by our focus on hiring and retaining talented managers, pairing complementary teams, and keeping costs low.3

“We can say that management structure does not detract from performance,” said Wallick. “That’s not what’s going to decide success or failure. What matters are the core things that always matter in choosing an actively managed fund: identifying talented managers, getting that talent at a low cost, and being patient.”

1 Sources: Vanguard and Lipper, a Thompson Reuters Company, as of December 31, 2015.

2 Source: Vanguard. Peer groups and peer group data provided by Lipper, a Thomson Reuters Company. Results will vary for other time periods. Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all investments are subject to risks. For the most recent performance, visit our website at

3 Source: Lipper, a Thompson Reuters Company. For the 10-year period ended March 31, 2016, 7 out of 12 Vanguard’s multi-manager equity funds surpassed their benchmark averages.  Results will vary for other time periods.  Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Benchmark comparative indexes represent unmanaged or average returns on various financial assets, which can be compared with funds’ total returns for the purpose of measuring relative performance. Visit for updated Vanguard fund performance.


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