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Bogle Discusses Shareholders' Just Deserts


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?