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Do Waddell & Reed's Ivy Funds Add Value?

There were a number of people defending Waddell & Reed funds after I compared their performance against Vanguard, which offers passively managed funds. One commenter suggested I look at the performance of the firm's Ivy funds, as well as the actively managed fund WDR Asset Strategy (UNASX). So I did.

Before I go into the findings, it's important to note a few things:

  • Even if markets are perfectly efficient, we should expect to see some active managers outperforming appropriate benchmarks, purely randomly.
  • It's easy to identify the few winners. All you need is a database, such as Morningstar's.
The first thing I did was check the record of WDR Asset Strategy Fund. As I expected, the results were excellent -- no one would cite a fund with a poor record to make a point. For the 10 years through the end of the first quarter, the fund returned 9.24 percent per year.

One question you should ask is: While we know today that the WDR Asset Strategy fund turned in a solid performance, how would we have known that beforehand? The answer is there's no way to have known. And all the evidence suggests that the past performance of WDR Asset Strategy is a poor predictor of future performance, which is exactly why the SEC's disclaimer is required. It's there to protect investors from relying on past performance.

Then I checked the records of the Ivy funds. Similar to our original comparison of Waddell & Reed funds, we compared funds that had both a 10-year track record and a comparable passively managed fund from Vanguard. (I also showed DFA funds if the company had a comparable fund with 10-year returns available.)

Here are the results, which are the 10-year average annual returns through the end of the first quarter.

Bonds Ivy Bond Fund -- 4.86 percent
Vanguard Intermediate-Term Bond Index -- 6.81 percent
DFA Five-Year Global Fixed Portfolio -- 4.82 percent

European Stocks Ivy European Opportunities Fund -- 1.87 percent
Vanguard European Stock Index -- 1.83 percent

Mortgage Securities Ivy Mortgage Securities Fund -- 3.42 percent
Vanguard GNMA Fund -- 6.21 percent

Pacific Stocks Ivy Pacific Opportunities Fund -- 8.24 percent
Vanguard Pacific Stock Index -- -0.05 percent
Real Estate Ivy Real Estate Securities Fund -- 10.83 percent
Vanguard REIT Index -- 11.18 percent
DFA Real Estate Securities Portfolio -- 11.26 percent

Small-Cap Value Stocks Ivy Small-Cap Value Fund -- 10.00 percent
Vanguard Small-Cap Value Index -- 8.41 percent
DFA US Small-Cap Value Portfolio -- 9.44 percent
DFA US Targeted Value Portfolio -- 10.41 percent

Value Stocks Ivy Value Fund -- 1.63 percent
Vanguard Value Index -- 1.82 percent
DFA US Large Cap Value Portfolio III -- 5.89 percent

In four of the seven cases, the Ivy funds underperformed a comparable passively managed fund. One more case basically ended in a tie, and another case showed mixed results. As I said when we looked at Waddell & Reed's funds, active investing appears to be the triumph of hype, hope and marketing over wisdom and experience.

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