Special Guest Q&A - Saint Jack to the Rescue
January 5, 2004
Roy Weitz, publisher of fundalarm.com, and Jack Bogle, founder, Vanguard Group, faced off last May on some of the problems the two outspoken critics have found rife in the industry (see inaugural issue of Money Management Executive 5/19/03).
Since then, of course, those problems have mushroomed into full-scale dilemmas, and their prescient views have rung truer than they could ever have imagined.
While unpopular (one fund executive called Bogle a Bolshevik at an ICI meeting in the mid-1990's), Bogle's and Weitz's viewpoints cannot be ignored. Bogle was called as a star witness at the House of Representatives' financial services committee hearing on mutual fund practices last winter (see MFMN 3/17/03), even before Spitzer began his investigations.
As we are more than likely to hear the official opinions of Bogle and Weitz in the year ahead, courtesy of the regulators and lawmakers, read on, in part one of a two-part interview, to find out what they see as some of the critical issues facing the mutual fund industry today - and how to fix the problems.
Weitz: So, back in May, when we did an interview for a special edition of Money Management Executive for the ICI General Membership Meeting, we were ahead of the curve.
Bogle: We talked about all of the problems before the scandals !
Weitz: Has the word vindicated crossed your mind?
Bogle: Actually, not. I don't think about life as being vindication. The mathematics have always supported my position. The obvious direction of the industry was there for anybody to see it.
I feel badly about the investors who have been hurt - and the investors whose trust has been betrayed. So, I don't think this is much of a time for gloating, except in the sense that out of this chaos will come order.
Weitz: When this scandal finally runs its course, what meaningful reform might it bring about, if any?
Bogle: We are going to accomplish a lot, and let me divide it into two categories. One is specific regulatory steps that can be taken to make sure these things don't happen again. And I would say, number one, the 2%, 30-day redemption fee that has been bandied around would actually be sufficient in a five-day period.
Number two, make the closing time, or else you face that terrible symbol of perdition: getting the next day's asset value [laughs], which 49.5% of the time is cheaper than the previous day's net asset value. So, this is a tempest in a teapot on that point.
Although, I happen to believe it would be far wiser to set a 2:30 p.m. cutoff time, so that the manager knows his cash flow for the day and, then, can invest at prices that reflect the closing asset value.
There is such a thing as accounting purity in all this, which is that cash flow and the investment purchases should meet at the same price. That's what we do at Vanguard in our index funds, although we don't do it for institutional purchases because they can't be done by 2:30 p.m. So, everybody has that problem.
Weitz: Do you think Spitzer & Co. have run amok in their arrests and charges?
Bogle: I wouldn't mind seeing some real penalties for violation of the law. If someone's really cheating, I don't see why going to prison shouldn't be a perfectly good alternative. After all, Jean Valjean, the protagonist of Les Miserables, only stole a loaf of bread. I wouldn't be that tough, but I'd be tough. And we may need other regulations.
I have to think that one unexplored area has been where all the buying power that mutual funds have had for IPOs. They ought to be looking into what they did with them. Did the managers use the hot IPO market to pump up funds that were small? Or did they use them as they should, for the funds whose buying power created the opportunity to own them?
Clearly, it [directing a hot IPO stock] is a drop in a bucket for the funds, but when you are talking about who owns the money, a drop in the bucket is important, and the money should go to the right place. I suspect an investigation of that will show some real problems.
Weitz: So, you think the investigation into market timing, late trading, compensation and fees might advance into yet other thorny areas?
Bogle: I think this industry is in such sad shape that just about everything, as the ICI is wont to say, is on the table.