Mutual fund pioneer honored

John C. Bogle, founder and senior chairman of the board of The Vanguard Group, is known for a distinctive style of management and communication he terms "plain talk." That style was in evidence when Bogle visited UD Oct. 22 to take part in a series of events, culminating with his acceptance of an honorary doctor of laws degree.

The highest honor the University bestows, the honorary degree is presented to individuals who have made significant contributions to the quality of life in the nation. Previous honorees have included Supreme Court Justice Sandra Day O'Connor and artist Andrew Wyeth. UD Trustee William T. Allen, former chancellor of the Delaware Court of Chancery and now a New York University law and business professor, conferred the degree.

"John Bogle's life reflects such a deep commitment to the concepts of duty, honor, candor and diligence and service to others that the most complete summarization of the man is to say that he is a man of high virtue," said Allen. He further praised Bogle as "a great businessman [who] has changed the world in a way that confers huge benefits upon countless citizens."

Bogle joined the mutual fund industry in 1951, immediately after graduating from Princeton University, and founded The Vanguard Group in 1974. Today, the Malvern, Pa., company is one of the two largest mutual fund organizations in the world, comprising 100 funds with current assets totaling $500 billion. Bogle invented the concept of the index mutual fund, in which the fund's performance reflects that of the stock market in general, when he founded the Vanguard 500 Index Fund in 1975.

Bogle's day on campus also featured various receptions, a dinner in his honor and a guest lecture, titled "The Economics of the Mutual Fund Industry," which he delivered in the afternoon to a capacity audience in an MBNA America Hall lecture room. The audience included undergraduate and graduate finance students, College of Business and Economics faculty, members of the student-run Blue Hen Investment Club and others interested in the business of investments.

Bogle began his lecture by describing the mutual fund industry--whose assets have mushroomed from $94 billion in 1979 to more than $6 trillion today--as "one of the great success stories of our age."

"We've become the investment choice of American families," he says. "This is really an industry on the move."

But, Bogle was quick to point out what he calls "chinks in the armor" of the equity fund industry, which, he says, has failed to perform as well as the overall stock market. In the past 20 years, for example, the stock market has provided investors with a compound return of 16.7 percent annually, while the average U.S. equity fund has provided a compound return of 14.7 percent per year.

"Funds fall well behind the returns of the market by an amount remarkably close to the costs the [funds'] managers incur," he says. "Those costs are large." They include expenditures for such items as portfolio management and investment research, marketing, services to shareholders--many of which Bogle views as unnecessary and "thinly disguised marketing efforts"--and profits for the fund managers.

"What this means, plain and simple, is that the fund investor put up 100 percent of the initial capital and assumed 100 percent of the market risk...and received just 70 percent of the market's return," he says. "The fund manager put up none of the capital and took none of the risk, yet collected 30 percent of the return. It just doesn't seem like a fair shake for investors, and it isn't."

Bogle, the author of Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (John Wiley & Sons, March 1999), also shared other thoughts during his lecture and the question-and-answer session that followed.

The mutual fund industry, he says, should make public more of its financial information, including a breakdown of its expenses. "We need the sunlight of full disclosure," says Bogle, who has urged the U.S. Securities and Exchange Commission to encourage such disclosure. "It's high time, as they said in Watergate, to follow the money."

Mutual funds have a "hyperactive turnover" that shortchanges investors by resulting in both lower returns and higher taxes, Bogle says. He notes that the typical fund holds its average stock for 326 days. "Mutual funds, traditionally known as long-term investors, have, by holding stocks for only a year on average, become short-term speculators," Bogle says.

By contrast with the typical equity fund, he says, index mutual funds provide a higher return to investors. Index funds follow a "buy-and-hold" philosophy, Bogle notes, and avoid sales commissions and investment decisions by buying a predetermined "index," or list of stocks, selected to mirror the market as a whole and duplicate its performance.

Bogle sees an inevitable slowdown, or reversal, of the bull market of recent years, but he also sees stocks as a good long-term investment. When asked whether the market is overvalued today, he says he doesn't spend too much time pondering that question. "Whether the market is overvalued or undervalued or fairly valued," he says, "if you're going to make money, you have to be in the market."

–Ann Manser