At Bogle Event, Musings on Profit Motive, Fiduciary Responsibility

“I’ve done the best I could to build a better world for investors,” said John Bogle (left) at an event honoring his legacy on Tuesday in New York, with multiple luminaries of the investing and academic world gathered to add their congratulations on Bogle’s efforts over the years.

Former President Bill Clinton sent a congratulatory email which was read by Knut Rostad of the Institute for the Fiduciary Standard, one of the sponsors of the John C. Bogle Legacy Forum, held at the Museum of American Finance on Wall Street. In his trademark style, Bogle said that while he was “hugely honored and terriby humbled,” he lamented that despite its name, “Vanguard remains a leader without a following,” saying that “the silence of the funds remains deafening” when it comes to not only keeping costs and turnover low in their funds and not attempting to time the market, but in putting investors first, as Vanguard has done through its unique ownership structure. Bogle also said there was a “crying need for a fiduciary standard” in the industry.

As part of the first panel of heavyweight investing professionals discussing index investing, Burton Malkiel of Princeton and Random Walk fame called Bogle’s invention of the index fund “a revolutionary contribution,” and recalled that at the time, the Vanguard index fund was known as “Bogle’s folly.” That was so partly because the Efficient Market Hypothesis (EMH) argued that indexing was unnecessary, but Malkiel said that regardless of whether the EMH was accurate, “Jack’s argument” justifying indexing—the CMH, or “cost matters hypothesis” trumped the Efficient Market, as proven by landmark research showing that lower-cost managers tended to outperform higher-cost managers.

Roger Ibbotson moderated the first panel, which in addition to Malkiel included Gus Sauter, CIO of Vanguard, and David Swenson, who runs Yale University’s endowment company. Malkiel mentioned what he said was his favorite quote about Bogle, a blurb to an investing book: “While many mutual fund managers chose to make millions, he chose to make a difference.”

Sauter said that Vanguard was managing $1 trillion in index funds, and that index funds represented 25% of mutual fund industry assets. Getting to the nub of the matter, Swenson responded to a question from Ibbotson about active vs. passive investing by saying that the profit-motive on the part of active fund managers conflicts with their fiduciary responsibility.

Moreover, instead of the “terrible results you get from active management,” a fiduciary approach, with low volatility funds and low costs, encourages investors to stay the course.” Malkiel agreed with Swenson, saying that the reason why there are no other followers of Vanguard is, again, the “profit motive” of fund managers and fund companies.

The panelists agreed that, in the words of Sauter, “there is a potential for ETFs to democratize” the more complicated investing strategies followed by investors like Swenson at Yale, but they also worried that some investors are “getting themselves in trouble” with those ETFs.