Vanguard chief works to cut investors' costs


September 05, 1993|By WERNER RENBERG

If you're one of the 4 million individual or institutional shareholders who own the $120 billion of assets held by Vanguard mutual funds, you have felt the impact of John C. Bogle on both your investment decisions and your investment returns.

And even if you're invested in competitors' funds, you may have felt the impact of some of his policies.

As chairman of the Vanguard Group since its formation in 1974, he has been committed to holding down costs to investors. That goal has been facilitated by a unique corporate structure: The funds jointly own the group and obtain from it, at cost, nearly all administrative, shareholder accounting and distribution services.

Bogle launched the first fund linked to a stock price index (Standard & Poor's 500) in 1976, converted the group's funds to no-loads in 1977, brought bond fund management in-house in 1981, and has persuaded its equity funds' outside advisers to accept low fees. (Vanguard's 11 index funds are managed in-house at cost.)

Moreover, he has been forthright in reporting to shareholders on Vanguard funds' performance, acknowledging up front in his chairman's letters when they lagged peer funds or indexes.

Bogle also has preached what he has practiced, lecturing competitors -- or making recommendations to the Securities and Exchange Commission, which regulates funds. Among his pet peeves: high operating expenses and sales loads, misleading advertising or promotion claims, inadequate reports.

Ask executives of competing fund companies what they think of Bogle's criticisms, and about the most disparaging comment you get -- along with occasional compliments -- is that he is a shrewd marketer.

Even though Bogle says that he doesn't think of himself as a marketer, Vanguard's growth is at least partly due to his advocacy of mutual funds as a prudent way of investing and to his dedication to low costs.

To help investors weigh the claims, characteristics, policies, and records of more than 4,200 equity, bond, and money market mutual funds, he has just written a book, "Bogle on Mutual Funds: New Perspectives for the Intelligent Investor."

Although he refrains from plugging any Vanguard fund, no one will be surprised if the book's recommendations lead readers to picking a Vanguard fund or two. Nor will anyone familiar with the cautious, analytical tone of Bogle's letters to shareholders or speeches be surprised if he refrains from promising overnight wealth.

Whether or not it's a bit self-serving, the book can help you select funds likely to achieve your investment goals and ensure that your goals are both appropriate and realistic.

The book is not difficult to read, but you may have to reread some of its more sophisticated passages to be sure of what Bogle is saying. Such efforts should be rewarded by a better understanding of fund investing -- and possibly by enhanced long-term profits and less lost sleep over taking investment risks.

His discussion of historic returns on stocks, bonds, and money market instruments illustrates the importance of investment basics: allocating money among asset classes, holding for the long term, reinvesting dividends, and diversifying stock holdings.

Bogle divides stock funds into five classifications:

* Growth, value, and equity income -- "mainstream funds" whose price movements are highly correlated with those of the general stock market and which should constitute the core of your fund portfolio.

* Broad-based specialty funds (such as aggressive growth, small company and international) and concentrated specialty funds (such as utilities and gold), which should have a minor role.

Because many funds fall short of matching the performance of relevant stock price indexes, Bogle maintains, you only can be sure of approximating average performance by investing in index funds.

He notes that the gap between the returns of an index fund and its target index should be due only to operating expenses. An index fund with low costs, therefore, should beat actively managed funds whose investment advisers charge them fees that will produce profits for them.

He is even more outspoken on advisory fees and other expenses for relatively easy-to-manage bond funds whose yields -- and, thus, whose returns -- can be reduced by high costs.

While low-cost mutual funds have made Bogle wealthy, he doesn't often miss an opportunity to save when spending his own money.

Ask him whether he permits himself any extravagances, and he mentions his 14.5-foot sailboat, "Blue Chip," and the easy-to-use camera he bought "for a couple hundred dollars" for a recent vacation. Where did he go? Scotland. Naturally.


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