Never let it be said that retirement is slowing
Vanguard founder and former chairman
Jack Bogle down -- he continues to pound the table on the same issues that have gained him a loyal following among the nation's investors -- low turnover, low fees and long-term outlook.
During his latest assertion of his investment philosophy yesterday at a presentation before the
Practicing Law Institute in New York City, Bogle said that the mutual fund industry had "lost its way" and had become far more of a marketing business than an investment business.
In addition, Bogle focused on five "myths" about mutual funds, their shareholders and their portfolio management.
Myth 1. Mutual funds are long-term investments. "During the past five
years, more than 2,000 new equity funds have been formed, most of them
designed to capitalize on the public appetite to duplicate in the future the
fabulous past returns captured by stocks in this so-called New Economy of
technology, telecommunications, and science," said Bogle. "If history is
any guide, few of these funds will be with us a decade hence." He added that
some 450 funds have disappeared in the last two years alone.
Myth 2. Mutual fund managers are long-term investors. Bogle said that
fund managers have turned from long-term investors to short-term speculators.
He noted that fund turnover has consistently exceeded 80% over the past few
years - up sharply from the 15%-20% rate of the 1950s.
Myth 3. Mutual fund shareholders are long-term owners. Bogle
said that a "sea change" is occurring in the character of fund owners
from long-term to short-term. He presented statistics to show that the all-in
redemption rate (redemption and exchange redemptions) increased to nearly 40%
in 1999 and soared to 50% in the first three months of 2000. This short-term
orientation "violates the most fundamental principle of investment success:
Invest for the long pull," he said.
Myth 4. Mutual fund costs are declining. Bogle outlined the increase
in fund expense ratios over the past 50 years. In 1950, he said, the expense
ratio of the average equity fund was 0.77%. The average expense ratio
increased to 0.96% in 1980, 1.20% in 1987, and leveled off at about 1.40%
through 1995. At year-end 1999, the expense ratio reached 1.58%. "In all,
the expense ratio of the average equity fund has risen by more than 100% - a
doubling of unit costs," said Bogle.
Myth 5. Mutual fund returns are meeting the reasonable expectations of
investors. According to Bogle, large cap funds have lagged their benchmark by 2.9 percentage points per year, mid-cap funds by 4.7 points, and small-cap funds by 2.0 points over the past 15 years (on a pre-tax basis). "Given the high fees and operating expenses, the short-term investment horizons, and the substantial transaction and tax costs, it is small wonder that mutual fund returns have lagged so far behind the substantial returns
generated by U.S. stocks during this greatest of all bull markets," he concluded.
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