Vanguard might be known for its low-cost index funds but it carries a slew of actively managed funds too. In fact, one of the best investors ever managed Vanguard’s Windsor Fund for 31 years.

John Neff’s career at Vanguard began in 1964 until his retirement in 1995. Under his watch, Winsdor Fund outperformed the S&P 500 23 out of 31 years with a 13.7% annual return. That’s 3% better than the S&P 500 over the same period. Even better, he earned a 20% annual return on his own portfolio over the 10 years following his retirement.

More impressive is the fact that Neff believed his pay should be tied to his ability to beat Windsor’s benchmark. He convinced John Bogle to add an incentive-based fee structure to Windsor’s already low fees.

Windsor charged a 0.16% fee with an incentive-based fee that swung up or down 0.10% based on performance. If Windsor beat the S&P 500 the fee bumped up to 0.26% but if it fell short, the fee dropped to 0.06%. It wasn’t a pure beat either. Neff needed to beat the S&P 500’s trailing three average return by 1.2% to hit that incentive.

Neff had a value investing discipline. He was known as a low-P/E investor. It often led him to neglected cyclical stocks where selling was inevitable. However, his perfect stock provided dividend yield plus growth. A high total return at a low P/E multiple was his goal. Continue Reading…