John Bogle Speaks At the Boston Security Analysts Society

In 2004 Time Magazine named John Bogle one of the "world's 100 powerful and influential people".  It was the latest in a series of honors for a man who has probably done more to change the investment industry last century than anyone else.

This is not hyperbole - almost 20% of the $23 trillion invested in mutual funds are in index funds, a concept pioneered by Bogle in the 1970's.

 The company he founded - Vanguard - is today the largest mutual fund company in the United States.  Indeed, 88% of the mutual fund flows in recent years have gone to just three mutual fund companies - Vanguard, Fidelity and Blackrock - which all feature index funds as a cornerstone of their fund line-up.

Bogle is 85 years old today, and had a heart transplant in 1996.  However, his mind remains sharp, and he still goes to the office seven days a week. He has published 10 books, including his most recent publication "The Clash of the Cultures: Investment vs. Speculation".

John Bogle was the featured speaker at a luncheon sponsored by the Boston Security Analysts Society (BSAS) last Friday.

The room was packed - Bogle's thoughts have resonated with industry participants in a way that few others have accomplished.

Bogle's message, however, is one that should have been troubling to many in the room; namely, that active management of funds is a futile exercise.  Managers as whole will underperform the market due largely to their higher expenses including management fees and trading costs, according to Bogle, and the data seems to bear him out. Individuals should stick to index funds, in Bogle's view.

When John started in the business in 1951, investment management was considered a fiduciary responsibility, with the interests of their clients always placed first.

However, as more mutual fund companies have become publicly-held, or are owned by larger public companies, an inevitable clash of interests has arisen, since the drive to increase fees has resulted in managements offering funds that they think will sell well, but may not serve the best interests of the investors.

On Friday Bogle noted the proliferation of funds.  There are more than 9,000 mutual funds offered to the public today, and more are developed and marketed each month.  Bogle decries this trend, believing that the marketing departments, and not the investment professionals, are driving the decisions.

Bogle also looks with scorn on the management styles of many fund managers.  Sixty years ago the average mutual fund turnover was just 10% per year. Today, managers on average churn their holdings by 140% yearly.  In Bogle's view, such active trading activity has only resulted in higher costs and poorer returns, which the data support.

Expense ratios for nearly funds have risen over the decades despite the growth in assets under management.  Only one fund company - Vanguard - has seen a significant decline in expense ratios, which in Bogle's view is the correct trend.

Bogle offered numerous other insights in his talk on Friday, but I would direct you to his website (http://johncbogle.com/wordpress/) to read his numerous thoughts.

I have read parts of "The Clash of Cultures", and have found it very useful. I keep a copy of his "10 Rules of Investing" on the bulletin board next to my desk as a reminder of what one of the most successful and innovative thinkers in the investment business has learned in his career.

You can watch the video here: