Eleven years ago today doctors gave John C. “Jack” Bogle a new heart.
But the founder and former chief executive of Vanguard proved in a speech Tuesday that his passions remain right where they were when “the Father of the Index Fund” first founded his
“I am looking for the industry to focus on all things stewardship,” said Bogle, in this fourth address at the National Investment Company Service Association’s Annual Conference & Expo. In each of his past speeches, Bogle has predicted an industry that focuses on shareholder value, rather than fund company profit, he said.
The shareholder revolution that would “drag fund companies kicking and screaming” to change their structure that he predicted in his first speech to the group in 1977 has not happened completely. He believes the shift in mindset is, in fact, underway. “I am an eternal optimist,” he said.
“I have a dream,” he said. That dream includes an industry where mutual fund investing is designed “for the shareholder, by the shareholder,” he said.
To help accelerate that shift, Bogle laid out five mandates for the mutual fund industry.
First, Bogle said, “We must design a new industry in which we give investors a fair shake.”
In the past 30 years, mutual fund assets have grown from a $37 billion business to a $10 trillion dollar industry, yet costs to shareholders have remained relatively stable.
In fact, in 1977, Bogle predicted that as the industry grew, expense ratios would fall from the ten average level of about 1%.
By 1987 the average expense ratio instead surged to 1.38%, a 40% jump. Bogle did not back down, but by 1997, the averages were not much better, again despite monumental inflows. “These staggering economies of scale, rather than being shared with the shareholder have been aggregated to the [fund] manager,” he said.
Investors are becoming increasingly sensitive, he said, noting that the five firms that accumulated the most assets in 2006 also happened to be the five with the lowest expenses.
Bogle’s next mandate called for the industry to “serve investors for a lifetime.” In 1977 mutual funds represented only 7% of retirement holdings. In 1987, that figure dipped to 4%. “We’ve come a long way from that paltry 4% of 20 years ago,” he said. Today, retirement accounts represent $3 trillion of the industry’s $10 trillion under management, and 40% of all long-term mutual fund assets.
The problem is that investors don’t understand the importance of holding funds long-term, and are overwhelmed by fund options. Investors need better and more education, he said. “We’ve given too many choices and investors have used them badly, “ he said.
Third, Bogle asked industry leaders to “turn back the clock.”
“We must return to the roots of our industry,” he said. Within funds, asset turnover has skyrocketed, he said, with some funds turning over 110% per year. The average fund holds assets for only 16 months. Frequent trading, while lucrative for custodians, erodes shareholder value, he said. “This is rent-a-stock, as opposed to own-a-stock,” he said. Fund companies gain too, since they often trade among one another, but shareholders lose, he said.
Fourth, Bogle called for fund companies to serve the long-term shareholder, not the short-term gains-seeker. Three decades ago, the average mutual fund investor held his or her fund for 16 years. Today, it’s closer to four years. Hedge funds, which often move in and out of funds quickly, bear part of the blame, but fund companies share the culpability. A deluge of new-hot, but often performance trailing products encourage investors to chase performance.
“Once we were an industry that sold what we made. We have become an industry that makes what it sells,” he said. Bogle pointed to the volume of technology funds launched after the Internet bubble had long-since deflated, the fact that 670 of the 690 exchange-traded funds launched in recent years are too narrowly defined for retail investors to truly make sense, or good use, of them.
Finally, Bogle called for companies to better educate shareholders about how the markets work, and give fund owners more power in determining their course.
“Shareholder education has been glacially slow, yet time is money,” he said.
“Put fund shareholders in the driver’s seat.”
Fund directors should be truly independent, and each fund must have its own board, he implored. When fund companies go public, it raises questions about which investors’ interested directors are looking out for—that of the fund, or that of the parent company.
“The groundwork has been laid,” said Bogle near the end of his fourth decennial address.
“I’m gonna stick to my dream,” he said, promising to update the NICSA membership on the status of his predictions in another 10 years. “I’ve got Feb. 10, 2017 marked on my calendar,” he said. “See you there, God willing,” he said.