John Bogle, Keeping the Faith
November 29, 2010
John C. Bogle is a titan of the mutual fund industry, identified most closely with steadfastly promoting the investing principles of slow and steady growth and truthful financial reporting.
Many disasters of the past decade-the dot-com crash, the Enron and WorldCom accounting frauds, and, most critically, the credit crisis and global recession, would have been averted if his advice was followed closely.
The founder and retired chairman and CEO of Vanguard still believes-passionately-in the strength of corporate America and the merits of investing in stocks. Since the last decade delivered zero returns in equities, Bogle reasons, it is inevitable that in the next 10 years, the pendulum will swing back and investors will once again be rewarded. Bogle even sees a silver lining to the Great Recession: more honest, realistic and sustainable growth.
Under his watch at Vanguard from 1974 to 1996, Vanguard became the second biggest mutual fund complex in the world. In 2008, Vanguard overtook Fidelity as the biggest mutual fund complex in the world. Today, assets stand at $1.43 trillion, beating out Fidelity by more than $200 billion.
Bogle predicts that Vanguard will remain No. 1 for the foreseeable future due to its unique, mutually owned structure that returns profits to shareholders, its emphasis on fiduciary responsibility and its fees, which are among the lowest in the industry.
"You have been such a voice for integrity and transparency in our markets," former Securities and Exchange CommissionChairman Arthur Levitt recently said to Bogle on CNBC. "Your every stand has been so principled, so honorable, so decent. You've given this market a better name than it would have had without Jack Bogle."
Money Management Executive recently met with Bogle at Vanguard's Malvern, Pa., headquarters. Here are his views on the state of America's financial future:
MME: In your new book, "Don't Count On It!" (John Wiley & Sons, November 2010) you note that you were worried about the mind-bogglingly complex and expensive credit default swaps and collateralized debt obligations, long before the credit crisis of 2008. Because these instruments are outside the realm of mutual fund portfolios, why did they become such a concern to you?
Bogle: We obviously depend on a financial system that operates effectively and at understood levels of risk, and the mutual fund industry is part of this larger financial system. We're all in this together.
The speech that I gave to the Philadelphia Federal Reserve in the autumn of 2007, "Can Financial Innovation Go Too Far?" stressed that, yes, financial innovation had already gone too far. Our financial system is operated for the benefit of Wall Street insiders, rather than for the benefit of investors.
Innovation might be a positive for consumer goods, but I would say that the financial system is not just another business. We are a fiduciary business, a business that must provide stewardship for clients and appeal to the "better angels of our nature," to quote Abraham Lincoln's inaugural address.
And that's where we departed from our mission. We put our service to self before the service to the community.
MME: When did that start happening?
Bogle: The tension between financial innovation, or buccaneership, and prudent investing, stewardship and fiduciary duty-that tension has been there forever.
When did the mutual fund industry start becoming more of a business than a profession? At the beginning of this industry, the two very first mutual funds, Massachusetts Investors' Trust and State Street, were run by the trustees and didn't even get involved in distribution.
At MIT, the trustees were paid a fee equal to 5%, which actually gave them more money than they could spend. By the time I wrote my thesis on mutual funds, in 1951, 25 years later, they had reduced their fee to 3.5% of income, which gave them an expense ratio of a mere 19 basis points. That's a fact. Today, expense ratios are around 1.5%. In the world of the Investment Company Institute, this is called "a good example of the way fees have come down in the mutual fund industry."
So we gradually moved from being a reasonably balanced profession of noble faith, to one that survived by focusing on revenue. In the industry's first 40 years, up until around 1976, fund companies were run as two separate companies, with investment management on the one hand and distribution on the other. It became less common to have that separation with each passing year, but it's always been the tension in the business.