Mutual Fund Pioneer Says 'Party Is Over'
March 22, 2001
United Press International
WASHINGTON, Mar 22, 2001 (United Press International via COMTEX) -- John C. Bogle, one of the founding fathers of the mutual fund industry, expected the markets to fall -- but not as far or as fast as they did.
But it was a correction, in all senses of the word, that was overdue, Bogle said Wednesday at the National Press Club in Washington during a talk entitled "After the Fall: What's Next for the Stock Market and the Mutual Fund Industry."
Bogle's clarion call to current investors -- buy for value, and not for runaway growth.
"The party is over," Bogle said.
The founder of the Vanguard Group, one the nation's top mutual fund groups, Bogle spoke amid a backdrop of market conditions that have gone almost completely bearish, where investors have seen a 64 percent drop in the Nasdaq, a 25 percent drop in the Standard & Poor's 500 Index; and a 18 percent drop in Dow, since the slide began in March of last year.
The brunt of the decline, Bogle noted, has been borne by technology stocks.
"How did the huge technology-led bubble come to pass," Bogle asked? "A once-in-a-generation combination of a booming economy and the optimism of the new millennium; the ebullience engendered by a quarter-century without a single protracted market decline; robust growth in corporate earnings -- and the siren song of a New Era, The Information Age -- with growth projections for high tech companies that lost all touch with reality."
Bogle said that while he pronounced a year ago what would happen to the market, "it was just dumb luck that the timing of my prescient forecast hit the nail on the head." It is harder, if not impossible, he added, what guessing "when" things would happen in the market.
"I do not believe we have yet seen the stock market's lows," he said. "Although we are approaching prices that represent fair value, don't forget that the market overdoes everything."
According to Bogle, because the market had a swing before last March that was so far above fair value, the market pendulum is now likely to "over-swing on the downside as well."
"A new environment for investing which is more likely to be bland than spicy would hardly be without precedent," he said.
Bogle noted that the Dow Industrial Average first hit 1,000 in 1966, then 68, 76, 81 and again in 1982 -- a 17-year plateau -- before it began its steady movement to the higher ground it presently occupies around 10,000 points.
Using this as an example, he conjectured that the Dow would continue trading in a range of plus or minus 25 percent of the 10,000 mark, if not for the next nearly two decades, then at least for "an extended period of time."
When it comes to mutual fund investing, Bogle cautions investors that "cost matters." He noted that various fund costs can be numerous and substantial, and cut into returns. A list of costs includes management fees and operating expenses, sales charges, hidden portfolio transactions cost, opportunity cost, for a total aggregate average cost of 3.1 percent of net assets per annum.
"Simply put, there are too many croupiers in the mutual fund casinos, and their rakes sweep too wide a swath from financial market returns," Bogle said.
If one includes the taxes that "investors are socked with as a result of hyperactive portfolio trading" only half of the average 10 percent market return is actually realized for any given mutual fund investors.
Bogle said that over the last several years, fund investors have not been focused on the how costs diminish returns, because the returns from the market have been very generous on average.
He added that significant reductions in mutual fund management fees are long overdue in the industry, warning that if changes are not forthcoming at many funds, investors will vote with their feet and abandon funds with excessive costs.
And the industry needs to return to its longer-term orientation in investing versus the shorter positions that many fund managers take, Bogle said.
Bogle questions the mutual fund management "star" system, saying "the fund industry has produced infinitely fewer stars than comets."
For those not familiar with Bogle, besides being one of the pioneers of mutual fund investing, he is also widely hailed as the iconoclastic developer of "no-load" and indexed funds. He is considered by many industry observers to be a pro-consumer champion whose low-cost approaches have helped boost returns for investors.
Now retired as the head of the Vanguard Group, his former company is the nation's second largest group of funds. In the 25 years since Vanguard was established, it has grown from a $2 billion enterprise to one whose managed assets now amount to $580 billion, serving some 14 million shareholders.
One of his pioneering accomplishments was his use of index investing starting in the mid-70s with the first index-linked fund, which is still in existence as the Vanguard 500 Index, currently boasting around $90 billion in assets.
Bogle still stands by index investing as one of the best techniques for gaining value from market upswings, and protecting against marked losses during downturns.
By T.K.MALOY, UPI Deputy Business Editor
Copyright 2001 by United Press International.
SUBJECT CODE: 04000000
Disclaimer: Brill Editorial Services, Inc. is not a financial advisor, and the material presented at MFI is for informational purposes only and does not imply an endorsement of the funds mentioned or opinions expressed by writers or posters at MFI. Investors should consult all available information, including fund prospectuses, before making any fund purchase, and must exercise their own independent judgment when making any investment decision. Any questions or comments regarding this policy or Mutual Funds Interactive should be directed to BES. Mutual Funds Interactive and Funds 101 are registered trademarks of Brill Editorial Services, Inc. The Mutual Funds Home Page, FundLink, and FundWorld are service marks and the text herein is Copyright © 1995-2001 Brill Editorial Services, Inc. All rights reserved. Click here for MFI's privacy policy. |
