There are roughly seventy thousand professional money managers running institutional pension and retirement funds as well as retail mutual funds and exchange traded funds. They control about 70 percent of all stock market trading, but are extremely secretive with their clients and the trading they do in their portfolios, which they turnover more than once a year. Moreover, they and virtually all their colleagues in the retail fund management arena will tell you virtually nothing about their own personal investments. Fund managers don’t want you to know where they invest their own money because it might prove embarrassing if their investors were to discover they don’t have enough confidence in the funds they’re managing to put their own money in them.

One rare institutional manager caught our eye because he was the only one willing to break this Mafia-like code of silence and reveal exactly where his own taxable money was invested. This was exciting news from the start: Actually meeting someone who in fact bought Bogle’s Vanguard 500 Index Fund way back in 1976 when it was launched. Not only that, he still owns this dull, boring, passive fund that does nothing but sit quietly in his portfolio and track the S&P 500 index … chalking up a cumulative gain in excess of 2,500 percent since inception.

One rare fund manager … what are the others hiding from you?

Ted Aronson has a reputation for integrity. In fact, TheStreet.com called him “the world’s most honest money manager,” which may explain why, during 2002-2004 the years of the fund scandals, Ted was Chairman of the Board of Governors of the Association of Investment Management & Research, the professional society for 68,000 money managers. Unfortunately, he’s extremely rare, 99.9% of the other managers still hide behind the great Wall Street code of secrecy, with no disclosures.

Even more fascinating: This guy who has been adding money to the S&P 500 and other Vanguard index funds “forever,” although he’s an active money manager. His firm, AJO Partners manages roughly $20 billion for fifty clients, all institutional money, retirement portfolios, endowments and corporate pension funds. And not only has Aronson been in Vanguard 500 Index since day one, he also has all of his personal taxable accounts in ten other Vanguard index funds! And he adds, “I’m proud to say we’ve owned many of them for as long as they’ve been in existence.” Now that sure makes him a true-blue buy’n’hold investor.

Active manager investing in passive index funds?

But wait a minute: Isn’t this all a bit contradictory? Isn’t it a bit strange that a successful institutional money manager is putting his own personal money in dull, boring, passive index funds, not actively trading in the stock market? You ask: He’s got the experience as an insider, couldn’t he do a lot better investing his money in the accounts he actively manages, where he’d presumably make more money? Or at least to show his clients he’s confident of his ability to beat the market?

Yes, indeed, all veeery good questions! So stick with us and you’ll see the very simple reasons why Aronson puts the bulk of his own family’s money into eleven no-load Vanguard index funds, and why virtually all other portfolio managers refuse to admit the truth about their own investments. Listen closely, because there is a powerful lesson here for all investors in America, you can‘t trust most managers..

$10,000 in first S&P 500 fund now worth 250-times more

To begin with: That fab-u-lous S&P 500 index fund has served Aronson very well. It has averaged over 12.1 percent annually since Jack Bogle introduced the fund over 30 years ago, as the “First Index Investment Trust.” That means, if you’ve been in the fund since 1976, you’d have made a cumulative return in excess of 2,500 percent. In other words, if you gave Bogle $100,000 in 1976, your investment would now be worth $2,500,000, including the original investment. Twenty-five times as much as you put in. Now folks, that is exciting news!

And it’s even more exciting to know is that you would have made that kind of money even if you had stop reading the newspapers … avoided online trading … never watched CNBC … and simply stuffed your shareholder statements about Bogle’s totally boring, dull, passive index fund into a shoe box in your attic and never looked at them the past thirty years.

Vanguard sets the standard all funds have to beat

But still, that begs the real question, doesn‘t it: Because why would Aronson—a guy who actively manages $29 billion for other people with the goal of maximizing returns and beating the averages—put all his own family’s money in dull, boring, passive index funds? Why? Well, the fact is the money he manages for institutional clients is non-taxable money. And while “all of my family’s retirement money is in our funds,” says Aronson, “because the fund trades a lot, it’s not suitable for taxable investments. So all our taxable money is in Vanguard’s no-load index funds.”

Here’s why he says Vanguard sets the gold standard for performance: “My partner Kevin Johnson used to run the entire indexing show at Vanguard, where minimizing costs is crucial. By contrast, we’re active managers with annual turnover of 100 percent. I never forget that devil sitting on my shoulder, meaning the low-cost passive funds. They are stiff competition. Vanguard has it nailed. They win because they lose less. Their costs are lower. Quarter after quarter, year after year.” So please take a very close look at the eleven no-load Vanguard index funds in the Aronson family’s well-diversified portfolio. The percentages are the approximate asset allocations in the current portfolio; forty percent in domestic equities, thirty percent in foreign stocks and another thirty percent in fixed-income:

· Wilshire 5000 (VTSMX) (5%)
· S&P 500 Index (VFINX) (15%)
· Wilshire 4500 Mid-/Small-Cap (VEXMX) (10%)
· S&P Small-Cap 600/Barra Growth (VISGX) (5%)
· S&P Small-Cap 600/Barra Value (VISVX) (5%) 
 · Emerging Markets MSCI-EMGFree (VEIEX) (15%)
· Pacific Stock Index MSCI-PAC (VPACX) (10%)
· European Stock Index MSCI-EUR (VEURX) (5%) 
· TIPS: Inflation-Protected Securities (VIPSX) (10%)
· High-Yield Corporate (VWFHX) (10%)
· Long-Term Treasury (VUSTX) (10%)

Then, with an impish smile and tongue-in-cheek, Aronson summarizes his overall strategy here: “I obviously follow a highly complex, sophisticated strategy: Diversify. Keep costs down. Buy what’s wounded; sell what’s done well!” Bottom line: When it comes to protecting his family’s taxable money, Aronson is a real keep-it-simple buy’n’hold money manager, not the high-turnover, hyper-active trading quant at the office.

Why active managers can’t beat indexes – high costs!

Like most money managers, Aronson has a split personality when it comes to investing—he has one personality in his institutional office, another when he‘s at home, where he tells me he rarely looks at his portfolio and almost never changes his asset allocations, he simply adds new money to rebalance the actual assets to match the above model. Ted Aronson is incredibly blunt when it comes to his own business of active fund management. When asked why most fund managers can’t beat the indexes, he gave this simple reply:

“They can’t beat the indexes. Why? Costs. Funds charge annual expenses of one percent or more. Then it costs another 1.5 to 2 percent to buy and sell their stocks each year. It’s hard to imagine them doing anything but just following the crowd, because if they don’t mimic the index, they’ll get beaten by it.” They can’t beat the indexes, but they can still pocket billions in extras. His costs are under one percent, with fees tied to performance incentives.

Rare managers in a sea of sharks

Translation: Most actively-managed funds are actually closet index funds. To stay competitive, they are forced to focus on and match their peer index. And unfortunately, the high operating costs they add, make it virtually impossible for the taxable funds to beat their benchmark indexes. No wonder they’re doing the same as Aronson put their own money in simple buy’n’hold accounts. Just remember, Aronson’s one of the rare managers among 70,000 out there. The vast majority operate behind a massive wall of secrecy that protects them, while they get very rich and their investors make mediocre returns. After all, these guys manage over $11 trillion, so they’d rather not talk too much about the fact that every one percent in fees gets them $110 billion a year.

FirstPubDate: Dec’02