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was out, American Express senior management lost heart
for the challenge. The offering was withdrawn and the
project was abandoned.
In September 2011, The Wall Street Journal published a
letter to the editor written by Mr. Miller briefly describing
this history, at which point, yet another voice of creation
chimed in. An executive of TIAA-CREF reported that
way back in 1971, the firm received a letter from Nobel
Laureate economist Milton Friedman (who served on
the CREF Board) in which he proposed that the CREF
variable annuity should eliminate all investment analysis
and “adopt a mechanical formula whereby CREF simply
bought into a Standard & Poor’s 500 Index.” This idea also
fell by the wayside, never to reach fruition.
This multi-layered history of the development of the indexing
concept confirms my thesis that it is not the idea itself, but
its actual implementation, that ultimately wins the day. In all
of these forays into indexing: idea A+; implementation F.
Roundtable continued from page 29
not a political force. As a result, they lose when the issues
come up in Congress, for instance, or before regulators.
This isn’t a criticism of what he’s done; it’s really a question
and a challenge for those who agree with him to turn
those views into political power.
JoI: What do you think John Bogle’s lasting impact will be
on investing and investors?
Davis: There’s almost no one who can give a clear, independent
view of the mutual fund industry as well as Jack
Bogle. I think he’s opened a lot of eyes to the drawbacks
within this field, and I think that has a lasting impact. If he
hadn’t been out there throwing light on various practices,
then I think lots of people would still have their eyes closed
and they’d be losing more money than they are.
Ed Haldeman, CEO, Freddie Mac
JoI: What impact has John Bogle had on you
as an investor and financial professional?
Haldeman: Jack has impacted me in
many ways. As an investor, he has obviously
made me more aware of the significance of fees
and trading expenses on long-term performance. In
addition, he has provided a simple and useful framework
to allow me to think about the long-term expected return
from equities (yield plus expected earnings growth plus
change in P/E ratio). But more importantly, Jack has
impacted me by challenging me on the inherent conflict
between serving as a fiduciary and being an owner of
an asset management enterprise. Finally, through his
book “Enough,” he has impacted me by causing me to
re-evaluate my personal value system.
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?
Haldeman: My long-term market outlook is for U.S. equities
to return 7 percent per year; non-U.S. equities to return 8-9
percent per year; and diversified bond portfolios to return 4
percent. I definitely think traditional buy-and-hold should
play a major role in any portfolio. Some might argue that the
extreme volatility and low returns of the past five years means
that a buy-and-hold strategy doesn’t work any longer. I don’t
agree with that view. There is a difference between getting the
opportunity to time markets and being successful in timing
markets. We know that the extreme volatility of the markets
provided a huge opportunity to time the market, but this does
not mean that investors in aggregate who practiced market
timing outperformed the buy-and-hold strategy.
JoI: What do you think John Bogle has gotten wrong?
Haldeman: I am not so bold as to say Jack Bogle has gotten
something wrong. I will offer three areas where I have
had conversations with Jack in which I challenged his
views. First, I have questioned him on his long-held view
that non-U.S. equities should be only a small weighting in
the portfolio of a U.S. investor. To me, holding less than
a market-cap weighting in non-U.S. securities is logically
inconsistent. It is akin to holding less than a market-cap
weighting of financial stocks in an S&P 500 Index fund.
Second, I don’t think it is morally wrong to seek to outperform
the market. The possibility of outperformance
may be a low-probability event, but if an investor wants to
hire a fund manager in the hope that he might be one of the
few outperformers, I don’t think either the investor or the
fund manager has an ethical or moral problem. Sometimes
Jack’s language suggests he sees a moral problem.
Third, I have questioned Jack on why he focuses exclusively
on fees, when I believe investors in funds are hurt much more
by the gap between a fund’s return and the average investor’s
return in the fund. The differential in fees costs the typical
investor about 75 basis points per year. However, some of the
things funds do to encourage investors to mis-time their flows
in and out of funds costs investors 300-500 basis points per year.
JoI: What do you think John Bogle’s lasting impact will be
on investing and investors?
Haldeman: Jack Bogle will have many lasting impacts that
are incredibly significant. Certainly, Vanguard and the
benefits it brings to investors because of its focus on low
costs and passive management will have a lasting impact.
But his impact goes much beyond Vanguard. What would
be the market share of passively managed money without
Jack Bogle? What would be the average fee level of
actively managed money without Jack Bogle? Think how
much more net worth savers have because of the popularity
of index funds and the pressure on actively managed
fees because of index funds. The legacy of Jack Bogle will
endure and benefit millions of investors.
continued on page 49
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