the bogle issue - IndexUniverse.com

“mutual” investment services company.
Second, Bogle created the first publicly available U.S.
equity index fund, followed by a family of index funds covering
a variety of investment markets. By doing so he made
an indexing revolution possible.
Don Phillips, President of Fund
Research, Morningstar Inc.
JoI: What impact has John Bogle had on you
as an investor and financial professional?
Phillips: Jack is an inspiration. His willingness
to fight tirelessly for his cause and his alignment of his
interests so closely with investors’ is a model of entrepreneurial
spirit and ethical behavior. There is no one in the
industry whom I admire more.
JoI: What is your current long-term market outlook? Do
you think traditional buy-and-hold index-based investing
has a place in that market scenario?
Phillips: I think there’s a reasonable case to be made for modest
returns from equities and a poor case for bonds over the
next decade. I think that buy-and-hold index-based investing
makes great sense in this, or any, time. Remember, however,
that rebalancing is an important part of a buy-and-hold strategy.
Given the extreme success of bonds and the poor returns
of equities over the past decade, many investors may need to
rebalance their portfolios to get back on track.
JoI: What do you think John Bogle has gotten wrong?
Phillips: Not much. He may overstate his case at times—
don’t we all?—but directionally, he has an amazing track
record. Time is on the side of his argument.
JoI: What do you think John Bogle’s lasting impact will be
on investing and investors?
Phillips: Fifty years from now, when all of the current fund
leaders and CEOs have been forgotten, Jack Bogle will still
be remembered. He’s raised the bar for the industry, and
investors are the better for it. Fees nearly everywhere are
lower because of him. Investors are, and will continue to
be, more demanding because Jack showed them the way.
Rob Arnott, Founder and Chairman
Research Affiliates LLC
JoI: What impact has John Bogle had on you
as an investor and financial professional?
Arnott: We all need mentors or heroes to
help inspire us if we want to accomplish important things.
Jack ranks as one of my heroes, alongside Peter Bernstein,
Marty Leibowitz, Bob Lovell and Harry Markowitz. His
decision to launch Vanguard Group in his late 40s was
a contributing factor in my decision to launch Research
Affiliates in my late 40s. His missionary zeal for capweighted
indexation helped inspire my missionary zeal
for the Fundamental Index. His single-minded focus on
helping the end-customer to win—in his case, by cutting
implementation slippage and costs to the bone—reminds
us all that we can do well by doing good. In my case, the
quest for low-cost alpha trumps the quest for rock-bottom
pricing, but it’s fair to say that neither of us is a big fan of
high-fee random-alpha products.
JoI: What is your current long-term market outlook? Do
you think traditional buy-and-hold index-based investing
has a place in that market scenario?
Arnott: True buy-and-hold investing is a myth, as is true
passive indexing. Is there a single investor on the planet
who has never made a trade, has never rebalanced their
portfolio, or reconstituted their index investments to reflect
corporate actions? Of course not. But the basic idea of
buy-and-hold index-based investing has a very important
place in the investing pantheon: In the absence of a strong
conviction to the contrary, it should be our default choice.
I think it’s fair to say that I have a darker view of the
future than Jack, or indeed most of the investing community.
I think that a low-yield environment means lower
prospective future returns. I think that an aging population
means slower GDP growth. I think that an addiction
to debt-financed consumption, throughout the developed
world, crowds out the private sector capital markets, and
eventually crushes healthy entrepreneurial capitalism.
I think that stocks are like any other investment: Buy
them when they’re cheap and we don’t have to wait for
the “long run” to enjoy ample profits; buy them when
they’re expensive and we may have a very, very “long
run” to wait, before we can be happy.
In short, I believe that broad diversification into a wide
array of alternative markets, often at higher yields, trumps the
classic 60/40 buy-and-hold mantra. And while I love indexing,
I don’t love the fact that conventional cap-weight indexing
puts most of our eggs in the most expensive baskets, which
is not the ideal way to earn good long-term returns.
JoI: What do you think John Bogle has gotten wrong?
Arnott: Like a lot of visionary leaders, Jack is a bit rigid
about other points of view. His visceral distaste for ETFs—
“giving kerosene to arsonists,” as he describes them—
ignores the fact that investors can make grievous errors in
their daily liquidity with mutual funds, almost as easily as
with ETFs. Witness Russel Kinnel’s study “Mind the Gap,”
in which he showed that the time-weighted returns for
mutual funds exceed their dollar-weighted returns by over
2½ percentage points a year. Jack’s vocal criticism of the
Fundamental Index ignores the fact that we’re both “on the
side of the angels” in terms of vastly lower fees, vastly lower
turnover, vastly broader diversification and vast capacity,
when compared with most active managers and funds.
One of the things I like about Jack is that we can remain
friends when we disagree; it clearly helps that we’re in
agreement on 80 percent of the things we think matter.
He’s a bit like the wise and curmudgeonly uncle, usually
right and always insightful; we may find we occasionally
differ, to the consternation of the uncle, but we would be
fools to dismiss his insights without careful reflection.
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