Mutual fund innovator bangs drum for reform

Voice: For decades, John C. Bogle has criticized colleagues for the sorts of abuses exposed by recent investigations.

December 13, 2003|By Paul Adams | Paul Adams,SUN STAFF

For more than 50 years, mutual fund executives have tried to ignore John C. Bogle, founder of the innovative Vanguard Group of mutual funds.

Bogle earned the scorn of competitors for saying that the industry is tarnished by high fees, incestuous corporate governance and lack of accountability to shareholders.

Now, everyone is listening.

Mutual fund managers have been struggling to contain a scandal sparked in September, when New York Attorney General Eliot Spitzer began a series of revelations of widespread market timing, late trading and other abuses that have cost everyday investors billions of dollars.

Suddenly, Bogle, 74, a heart-transplant survivor and squash enthusiast who preached low costs with missionary zeal as he built Vanguard into the second-largest mutual fund company in the nation, can no longer be dismissed as an iconoclast with a "holier than thou" message.

Long before Spitzer, say admirers, there was Bogle.

"Jack Bogle built a multi-hundred-billion-dollar fund company, so he's an insider saying there's something wrong in mutual fund land, and he can't be dismissed," said Gary Gensler, former co-head of finance at Goldman Sachs, a treasury undersecretary in the Clinton administration and co-author of The Great Mutual Fund Trap.

"There are people in the mutual fund world that were hoping Bogle would take retirement seriously ... but he's been given a new platform with the Eliot Spitzer investigation."

After an internal power struggle, Bogle was forced to step down as Vanguard's chairman when he hit the mandatory retirement age of 70 in 1999. Rather than hit the links, Bogle launched a new career as a full-time industry critic.

Surprisingly athletic for a man with a secondhand heart, he manages his crusade out of a ground-floor office in the corner of Vanguard's legal department, which is part of a sprawling corporate campus outside Philadelphia. Decorated with antiques and stacked with books and papers, the space has an ambiance that feels more academic than corporate.

Employees still greet him reverentially as he strolls the halls, but he is no longer welcome in the executive offices upstairs. The unpleasant circumstances of Bogle's departure from the board have driven a wedge between him and his hand-picked successor, John J. Brennan. As they passed each other on the stairway one recent Friday, Bogle greeted his former protege. Brennan, who was walking with a Vanguard attorney, never looked up.

"I gave them their jobs," said Bogle, who was dressed comfortably in a green sweater and khaki pants. "I just don't understand."

Using a bully pulpit

Beyond Vanguard's walls, Bogle still draws crowds to his frequent speaking engagements. The pinky finger on his writing hand is disfigured by a bulbous callus, built up from years of writing speeches in longhand on legal notepads. The final drafts are typed up by an assistant who helps run the Bogle Financial Markets Research Center, which is funded with a stipend from Vanguard.

With the industry in turmoil, Bogle has used his bully pulpit more vigorously than ever, calling on lawmakers and regulators to implement reforms that would make the industry's fees more transparent and require directors to be independent.

Many are concepts he has been talking about in speeches and opinion pieces dating to 1949, when Bogle began writing his senior thesis on the mutual fund industry while studying economics at Princeton University.

"Nobody is speaking from my particular pulpit," he said. "I would easily argue that all I'm doing is being something I never expected to be, and that is a good businessman. Candor is a great marketing strategy."

His frankness has inspired legions of die-hard "Bogleheads," who meet in an Internet chat room to talk about his latest musings on investing and mutual funds. When the "Die-hards," as they call themselves, held a gathering in Miami in 2000, Bogle surprised them by agreeing to come. He was going to be in town that weekend for a conference.

"He was so unassuming that it was difficult to realize he was the founder of one of the largest financial companies in the world," said Taylor Larimore, co-founder of the Die-hards.

Bogle had dinner and stayed with the group for several hours. He has since attended two other Die-hard gatherings.

"With Jack, I think what you see is what you get," said Burton Malkiel, a Princeton economist who has been on Vanguard's board since 1977. "He is a man who says just exactly what he means. He doesn't pull punches; doesn't put a political spin on anything."

Not everybody agrees with Bogle's analyses.

The Investment Company Institute, an industry trade group, says Bogle's frequent complaints about management fees, high portfolio turnover and shareholder turnover are based on faulty math. For example, the institute says its studies show that total expenses for mutual funds have declined over the years -- a claim that flies in the face of Bogle's criticisms.

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