John Clifton Bogle is not only the founder of Vanguard but also the pioneer of the first no-load and the first index mutual fund. After stepping down as senior chairman of The Vanguard Group of Malvern, Pa. last December, Bogle became president of the Bogle Financial Markets Research Center, a think-tank at Vanguard headquarters.
McGraw-Hill of New York last month published Bogle's third book, "John Bogle on Investing: The First 50 Years." The book is a compilation of 25 speeches and articles by Bogle throughout his career. It includes his Princeton magna cum laude economics thesis, which later became the business plan for Vanguard, founded when Bogle was 36.
Mutual Fund Market News reporter Lee Barney recently met with Bogle to discuss his new book, his commitment to investor rights and his current endeavors.
MFMN: Why did you write this book and who did you write it for?
BOGLE: Jeffrey Krames, the publisher of McGraw-Hill came to me last December and asked me if I would collect some of the speeches and articles I have written over my 50-year career for an inaugural book in a series on "Great Ideas in Finance."
Jeffrey even asked if I would include my 1949 Princeton thesis, "The Economic Role of the Investment Company." Back in 1949, just after I had graduated from Princeton, Dow Jones had said they wanted to publish it, but at the last minute, they didn't.
So, it must be some form of poetic justice that - exactly a half-century later after I wrote that thesis, inspired by a "Big Money in Boston" article in Fortune magazine about the fledgling yet "contentious" mutual fund business - McGraw-Hill has published that thesis, along with others.
The book is focused on investors. It is not focused on financial intermediaries. But, I think intermediaries could learn from the book that there is some value in indexing and broad diversification, as well as keeping their clients' costs and taxes low.
MFMN: On this theme of investors' rights, do you think the forthcoming independent director's rules from the SEC will do enough?
BOGLE: I think they're a good start, but no more than a start.
I think we need further limitations on the number of affiliated directors. We absolutely need an independent chairman of the board of the funds. Funds deserve representation; that's what Vanguard's sole function was at the beginning, to give the funds a voice in negotiations with the adviser. Shareholders deserve their own voice at the top of the fund, and I hope that will come about.
It is also an absolute - it cannot be compromised - that funds need their own counsel independent from that of the investment manager. Can you imagine Ford Motor Company having as its counsel, the counsel to Firestone? It's not unlike the mutual fund industry's situation, yet we think it's absurd in the case of Ford.
MFMN: What about disclosure of fees?
BOGLE: It is fair to say that there is adequate disclosure of fees and expense ratios in prospectuses. But it would not be a bad idea to send investors quarterly bills showing them, in dollar amounts, what fees they are paying to their mutual funds. That's what the GAO [General Accounting Office] has recommended.
Also, fees, we have to realize, are only a small portion of total costs.
We don't say anything in this industry about the toll that transaction fees take on fund returns. The total expense ratio of a mutual fund averages 1.6 percent, while the average transaction cost is 70 basis points to 1.2 percent. And it could be a lot higher.
Further, nobody has ever talked about opportunity cost - the cost you incur over time in a rising market by being in a fund with a sizable cash holding that is not fully invested. Opportunity cost can be as high as 50 basis points.
So, now we're up to costs of 2.8 percent, and we haven't even gotten to sales charges yet, which can easily be as much as one percent a year! That brings the expenses up to 3.5 percent; that's a lot of shareholders' money.
To put it in hard dollar terms, if you invested $1,000 fifty years ago in a fund that kept up with the returns of the S&P 500, before management fees and taxes, you would have $550,000. But, minus an average management fee of 1.8 percent and annual taxes of 2.8 percent, you would be left with a paltry $55,000. That's not a fair shake for a mutual fund shareholder. If that investor had put their money in an index fund, they would walk away with $300,000. I want investors to know that when they go into that gambling casino we call Wall Street, the croupiers and Uncle Sam often take too much.
MFMN: Why isn't there really anyone else besides you actively defending investors' rights?
BOGLE: I think a lot of people are interested in doing what's best for investors, but they aren't speaking out much. My voice, I think it's fair to say, is a lonely voice.
However, TIAA-CREF, for example, is speaking out more, particularly in the area of corporate governance, which they are excellent at. I have a huge amount of respect for TIAA-CREF. They have the right values, the right investment strategies. I know their president, John Biggs. I know Marty Leibowitz, their chief investment officer. They are people of the highest caliber.
MFMN: What does the Bogle Financial Markets Research Center do?
BOGLE: The research is structured around the numbers I need for points I am trying to make in the many speeches I now give. They are designed to educate, to exemplify, to calculate, and to determine trends. Some are about the financial markets themselves. Some are about the mutual fund industry. Others are about the nature of market indexes, something that is starting to trouble me a little bit because I think there are too many.
Eventually, we will get into more broad projects, but only when I slow down my very aggressive public speaking schedule. I'm giving nine different speeches this month, all of which I write. That's a lot of writing. One of the speeches will be to the Chicago Society of Security Analysts on what active managers can learn from indexing. I'm also a Henry Kaufman visiting professor at NYU, so I will be giving a speech there on the financial markets.
MFMN: What do you think of the new Vanguard "Viper" exchange-traded fund shares?
BOGLE: They're basically a marketing device to allow traders to own the Vanguard funds. Reasonable people can disagree as to whether that's a good or bad idea.
MFMN: What do you think about the current popularity of exchange-traded funds?
BOGLE: They're very well designed. They're quite low cost compared to everybody except Vanguard, perhaps even a little lower cost than Vanguard. Although, we are giving a 12-basis point cost break [through the new "Admiral" program] to Vanguard shareholders with accounts of $50,000 or more. The exchange-traded funds also hold forth the possibility of being more tax efficient. I don't think the possibility is great, but people should judge that for themselves.
But the reality is, that while they are useful for long-term investors, they are used by short-term speculators. The Nasdaq Qubes, the most aggressive of the ETF's, turn over 2,800 percent a year, or once every four days.
The creators of these things know perfectly well what they're doing, and it has nothing to do with investing; it has to do with speculating. Speculating is a loser's game. Investing is a winner's game.
MFMN: What do you think the future of Vanguard is, as well as its future strength?
BOGLE: Its future strength is its past strength, of disciplined management, low cost, index-oriented - or at least funds with specified investment characteristics, such as our corporate bond and municipal bond funds that eliminate interest-rate guessing. To the extent that we stay the course, we are going to continue to be a powerful firm. I actually think we are going to be a great deal more powerful when we get into a bit of a bad market because people will think more seriously about the quality and cost of our bond portfolios. We also happen to have the only real series of bond index funds. In general, I am very pleased with the way that Vanguard is running.
MFMN: How did you come up with the idea for the first index fund?
BOGLE: In my Princeton thesis, there is a single sentence alluding to the idea. I said that you could not easily compare a mutual fund's records to the indexes, published by Wiesenberger at the time, as you can today. In that thesis, I said that actively-managed mutual funds can make no claim to superiority over the markets. That was a germ of the idea. And in the mid-70's, people were writing about indexing and even asking, Where's the index fund?' Everybody knew that everybody had the opportunity to come out with the first index fund. I simply took that opportunity.
MFMN: You have called index investing "boring." Is there anything you can do to make it more interesting?
BOGLE: No, you can't make an index fund any more interesting. Any embellishment to an index fund will take away from its value.
MFMN: What are you happiest about?
BOGLE: I am very happy to have given millions and millions and millions of investors a better way to invest, that is to say, their fair share of market returns. I've tried to conduct an honorable life, and I think people recognize that. I also think that people appreciate someone speaking out on their behalf. I also like talking to Vanguard people. I spend a lot of time talking to the individuals there about what the company and its values are.
MFMN: Where do you look for ideas?
BOGLE: I read a great deal. Ideas are a dime a dozen. There are a million of them out there. It only requires a small amount of observation power to turn one into an inspiration.
MFMN: Who are the "Bogleheads"?
BOGLE: They are a group of about 300 people who frequent a "Vanguard Diehards" chat room at morningstar.com, which happens to be one of Morningstar's most active chat rooms.
These Bogleheads' are actually wonderfully educated investors who share my investment philosophy, and we're going to have a meeting with them in Valley Forge next June.
They call me Saint Jack, a little tongue-in-cheek, but perhaps a little seriously tongue-in-cheek rather than mocking tongue-in-cheek.
