John Bogle

Bogle Speaks!

John Bogle

John Bogle fans were treated to classic indexing discourse from the great pioneer of indexing at the recent AXA Rosenberg investor conference in Boston.

Never one to pull punches, the founder of The Vanguard Group came out early with a harsh appraisal of active managers. "As a group, active managers will fall short of the index return by the exact amount of the costs that they incur. The central fact of investing, then, is this simple proposition: Investment success is defined by the allocation of financial market returns - stocks, bonds, and money market instruments alike - between investors and intermediaries," Bogle stated.

According to Bogle's analysis, for fund managers to outpace the market by 1% annually after costs of 2% (excluding taxes) it would require an excess return of 3%. In that case, the individuals who hold the remaining 65% of equities would, as a group, have to trail the market by about 2% per year or by 4% after costs. He added that, "by merely guaranteeing investors their fair share of the returns earned in the stock market, passive investing deserves a major place in the portfolio of individuals and institutions alike."

Arguments over degree of efficiency have occupied the minds of many investors, but Bogle flatly called the debate over efficient markets "irrelevant" to the basic fundamentals of passive investing. "Yes, theory suggests that in inefficient markets the winners will win bigger and the loser's will lose bigger, but winners are never easy to identify in advance," he said. "And in efficient and inefficient markets alike, all investors as a group share the market's returns before costs, and lose to the market in the exact amount of those costs."

But how to pick reliably? "Selecting an active manager is hard simply because successful investing in liquid, active, well-informed financial markets is itself hard," said Bogle. "How do we pick winning managers? Why, we analyze their past performance, and far more often than not, invest with those who have performed best in the past." But he noted that history has shown that yesterday's winners rarely repeat.

In closing, Bogle drew three conclusions about using past data to help select winning managers:

  1. Funds with superior longer-term past performance have, on average, provided a marginal advantage over the average fund.
  2. Choosing passive strategies reflected in index funds has provided an even larger advantage.
  3. Selecting low-cost funds has proven to be a major indicator of future superiority.