John Bogle is an icon and pioneer in the index-investing revolution. He is regularly quoted for his investor-first views centered on the idea that attempting to beat the market is folly.
He should know. His early career days at Wellington involved work trying—and failing—to beat the market. The creator of the first index mutual fund more than 30 years ago, and founder of Vanguard, a mutual fund and ETF giant with some $4 trillion in assets under management, has long been known as a champion of indexing.
But the vocal indexer isn’t really preaching the end of active management.
Speaking to an audience of 2,000-plus managers and investors at the Morningstar Investment Conference last week, Bogle said that index investing would probably come to represent 50-60% of the overall market someday. Active managers will survive, but only those who adapt to the times.
The recipe for survival? Well, it depends on who you ask. Many market pundits, researchers and even consulting groups have offered various takes on what active managers need to do to thrive in the face of low-cost indexing’s growing dominance. Bogle cited several in his keynote presentation in Chicago last week.
Some, according to him, suggested active managers offer better active strategies, some better track records, some better business models, better value propositions, and some even better use of technology.
Meanwhile, the evidence against active managers is pretty damning. Anyone who’s ever read a SPIVA report has seen firsthand the statistics that show active managers, by and large, underperform benchmarks after cost year after year. Those who do manage to eke out some outperformance only do so occasionally. Consistency in outperformance is nonexistent.
So all the suggestions on what active managers need to do are great, he says, but none really mean much to investors if fees remain as high as they are. Active management is expensive, and investors don’t really share in the gains.
“Managing mutual funds typically remains an insanely profitable business, with pretax profit margins often exceeding 50%,” he said. “During 1982-2016, we've been blessed with the strongest stock market in history. The S&P 500 enjoyed a 50-fold-cumulative gain, an average return of 12.1%. Few if any mutual funds earned this return for their shareholders, but no one seemed to notice because few shareholders were unhappy when they received, say, a 30-fold or 40-fold gain.”