The growth-and-income fund category at Vanguard is where you'll find the complex's most famous funds--500 Index and Total Stock Market. It's also where the supposed "has-beens" of active management reside, including Windsor and Windsor II.

Well, I've got news for you. These has-beens, their value peers as well as a couple of other growth and income offerings have all hit it out of the park when it comes to matching wits and returns with the indexes. The reason--stock picking, plus low operating expenses and an occasional dollop of cash.

Compare the performance of the many value funds in the growth-and-income group with both the S&P 500 and the MSCI Prime 750 Value index (the new bogey for Vanguard's Value Index). To say that the indexes performed miserably over the past three years would be quite the understatement. Of course, Vanguard will never tell you this. Chairman Jack Brennan still thinks you should buy index funds, and that's the advice you'll get when you call those 800 numbers in Valley Forge. Just remember that free advice is worth what you pay for it.

During the three years that coincide with the inception of U.S. Value, the S&P 500 dropped 30%. Value Index dropped 12.5%. Meanwhile, U.S. Value gained 11.4%, Windsor was up 9.9% and Windsor II was up 7.4%. Shall we fall back and look at the past five years, which includes the two final surges in the bull market that marked the decade of greed and saw the NASDAQ, S&P 500 and Dow all push to new highs? It makes no difference. Through the end of June, Windsor and Windsor II netted positive returns while the indexes were in negative territory (U.S. Value had not yet been born). And remember, the bull market was a market designed for growth stocks, not the value fare that the Windsors feed upon.

The more conservative, income-oriented funds like Convertible Securities and Equity Income also managed their way to market-beating returns. So, who says you have to index?

As I've noted many times in the past, growth and income funds often have a value orientation. Their growth peers typically don't have much in the way of an income yield, and tend to focus on companies whose stocks are pricier and whose earnings growth rates are (hopefully) higher. Meanwhile, most of Vanguard's growth and income funds are heavily invested in financial stocks while being fairly light on techs. In fact, the only fund with a higher weighting in tech than 500 Index is surprisingly Growth & Income, which also has a lower-than-market weight in financials.

Still, the P/E and price-to-book on Growth & Income's portfolio is less than that on the stocks in 500 Index. This slightly contrarian bent to Growth & Income's portfolio has stood investors well over time, as the fund has beaten the indexes at their own game.

As you can see in the table below, not all of the growth-and-income funds are mega-cap funds. Yes, 500 Index and Tax-Managed Growth & Income (which also tracks the S&P 500 index) are virtually identical, holding stocks with a median market capitalization of more than $50 billion. But U.S. Value and Windsor, for example, are quite different in terms of the size of the companies they hold.

Again, there are many ways that Vanguard's outside managers skin the growth-and-income value cat. U.S. Value, for instance, seems to take its value mandate most seriously, holding stocks with the lowest price-to-earnings and price-to-book ratios among the group.

What about returns? Well, they can vary dramatically. I've taken a look at rolling one-year, three-year and five-year returns over the past decade, or since a fund's inception if it's less than 10 years old. Remember, rolling returns, calculated month-to-month, show returns from January through December, February through January, etc. Over the past 10 years we've had both bull and bear markets to contend with, and my analysis covers more than 100 12-month periods, rather than the single one-year return figures from other data sources.

A couple of things are worth noting. First, for each fund I've calculated both the average rolling return as well as the average rolling return for the S&P 500 index for over the same time periods. Note, for instance, that Growth & Income has outperformed the S&P 500 over rolling one-year and three-year periods, and outperformed 500 Index over rolling five-year periods. (500 Index has, not surprisingly, been unable to beat its bogey, the S&P 500, since the fund does have small expenses.)

Also, note that in the limited time it's been available, U.S. Value's average rolling one-year and three-year returns have been significantly better than the index's. And, over rolling one-year periods, Windsor II has bested the index as well, while trouncing older brother, Windsor, overall. Why are rolling returns important? Because investors don't invest solely on the first day of the year, or the first day of the quarter. They invest throughout the year, on their own schedule. By looking at the returns earned over all these various periods, you and I will get a much better sense of how a fund performs for its shareholders, not for the record-keepers.

Comparing Growth and Income Funds
Number of Holdings		Price-Earnings Ratio		Price-Book Ratio		Top-10 Holdings		Median Market Capitalization
Total Stock	3,709	Total Stock	21.8	500 Index	3.0	Growth & Inc.	31%	500 Index	$50.4
500 Index	504	500 Index	20.9	T-M Grow. & Inc.	3.0	Windsor	30%	T-M Gro. & Inc.	$50.4
T-M Gro. & Inc.	501	T-M Gro. & Inc.	20.8	Growth & Inc.	2.8	Value Index	30%	Equity Inc.	$42.6
Value Index	412	Windsor	17.7	Total Stock	2.7	Equity Inc.	25%	Growth & Inc.	$38.4
U.S. Value	405	Equity Inc.	17.6	Equity Inc.	2.5	Windsor II	24%	Value Index	$37.2
Windsor II	247	Growth & Inc.	17.0	Windsor II	2.2	T-M Gro. & Inc.	24%	Total Stock	$27.7
Windsor	165	Windsor II	16.9	Value Index	2.2	500 Index	23%	Windsor II	$25.1
Equity Inc.	158	Value Index	16.5	Windsor	2.1	U.S. Value	20%	Windsor	$12.9
Growth & Inc.	129	U.S. Value	15.1	U.S. Value	1.9	Total Stock	19%	U.S. Value	$12.3
Does not include Convertible Securities or STAR LifeStrategy Moderate Growth

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