Bogle’s Dire Forecast for the Mutual Fund Industry
It took nearly 66 years for Jack Bogle’s embrace of the index fund to become the dominant trend in the mutual fund industry. In the wake of that dominance, the rest of the industry faces a painful decline, according to Bogle. His thesis can be applied to a key group of fiduciary advisors – those that are part of a “roll-up” entity – whose business models are flawed in the same way as those doomed fund companies.
Bogle is the founder and retired chief executive of the Vanguard Group. He spoke via videoconference on April 28 at the Morningstar investment conference in Chicago. A copy of the essay upon which his speech was based is available here.
The Investment Company Institute (ICI), the trade organization for the fund industry, rejected Bogle’s proposal to present his speech at its annual convention. To its noteworthy credit, Morningstar then quickly invited him to present at its annual investment conference, said Bogle.
Neither the ICI nor Morningstar should be happy about Bogle’s key prediction, which is that active fund managers owned by banks and financial conglomerates – nearly 80% of the largest fund companies – will become “cash cows” for their corporate owners and unlikely to invest in marketing. Ultimately, he said, those funds will be sold off at substantial losses.
The ICI and Morningstar derive significant revenues from active managers. Morningstar, in particular, is a beneficiary of the marketing dollars spent by those firms.
Much of what Bogle said was a reinforcement of his prior writings and speeches. But his prediction for the fund industry – and two strategies the funds will follow – was new material.
“Now is the time I have chosen to speak out about the mutual fund industry,” he said. “But this is not a victory lap. I’ve been around too long to take a victory lap before the game is over. Nor is it a valedictory, since I have much more to accomplish in my life and in my career.”
The triumph of indexing
The first part of Bogle’s talk was a recounting of the highlights of his career, starting with his 1951 senior thesis while at Princeton. In that 66-year old document, he articulated the principles that have guided his career, starting with the notion that mutual funds should be run for the benefit of investors, with the lowest costs possible and with no claim that they can beat the market.
Bogle described how he fought a bitter battle with Wellington management to offer an index fund, which ultimately led him to found Vanguard in 1975. He credited Paul Samuelson’s article in the first issue of the Journal of Portfolio Management in 1974 as the inspiration for his efforts. In it, Samuelson demanded that “someone, somewhere start an index fund,” and Bogle did.
“Indexing has triumphed,” he said. “Active managers will have to join the index revolution and/or expand their range of Investment options by adopting active management strategies or do nothing. Whatever the case, active management is not going to vanish.”
Bogle has first-hand experience with active management, both at Wellington and Vanguard. He recounted the painful lesson he learned when Wellington’s growth funds crashed in the bear market in the 1970s. Since then, he said Wellington and Vanguard have succeeded at active management primarily by keeping costs – both expense ratios and turnover – exceedingly low.