John Bogle: High Court Fell Short With Fees Ruling

April 08, 2010 What are your proudest achievements in your years at Vanguard?

Bogle: The achievements are four of the five innovations in this industry, say, in the past half century that have benefited fund investors. Those five innovations are: No. 1, the Vanguard structure that puts the investor first—shareholders over management. No. 2 is the index fund—a clear way to capture the long-term returns of the market with minimal cost. No. 3 was the defined-maturity bond fund. There were just a bunch of bond funds out there 30 or 40 years ago, and in 1977 we created the first series of bond funds—you had to choose between long, intermediate and short. They could have more income and more risk or less income and less risk. That was an important innovation. The fourth important innovation was the tax-managed fund. This has been an incredibly tax-inefficient industry, and we created, I think in about 1993, the first series of tax-managed funds in the industry’s history.

And the fifth one is the money market fund. That’s one we did not start. Was the money market fund a brilliant innovation? I think so, but we’re going through a critical time for money market funds, because their Achilles’ heel is promising everybody liquidity at a dollar per share. But like a commercial bank, you can’t give liquidity to everybody at a dollar a share on the same day. So money market funds, it seems to me, are going to come under new regulation, because if we’re going to, in effect, have a fixed asset value, we’re going to either have to insure them privately or pay to have some kind of government agency insure them. So the next chapter of the money market funds is yet to be written. On the other side of the ledger, is there anything you regret or might change about Vanguard?

Bogle: I was a little more aggressive in the ’80s, struggling to get this firm going and I was a little more focused on marketing than I ever should have been. We started sector funds, and we’ve gotten rid of most of them. And it’s a curious fact that while I regret that marketing-oriented decision, our healthcare fund and our energy fund have been two of the best-performing funds for shareholders in the industry’s history. So I don’t regret those two.

But I regret the other two or three or four or five that have come and gone. I started a group of funds called the Horizon Funds that had a little more distinctive and speculative flavor back in the early ‘90s. And they have come and gone. In the late ‘80s I was persuaded—but it was my decision so I have to take responsibility—to start real estate closed-end funds. That was in the halcyon days of real estate and people here persuaded me that real estate was a separate asset class. Well that may or may not be true, but when you put them into securitized form, it’s not a separate asset class. So those funds have come and gone.

So I come by my belief in simplicity not only by the innovations we created, but also by the regret about the times we departed from the straight and narrow and went into things I’m sorry to say were more marketing oriented than investment oriented.

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