当今共同基金行业——2015年4月28日幻灯片

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The Mutual Fund Industry Today: A Tiny Industry Grows into a Behemoth “Conflicts, Conflicts Everywhere”* $10,000 TOTAL ASSETS March 2015 John C. Bogle Equity $9.9T Bond 3.7T 1,000 Money Market 2.5T United States Securities Balanced 740B TOTAL $16.9T And Exchange Commission 100 TOTAL ASSETS Asset Management Unit Equity December 1951 $2.45B 10 Balanced 680M TOTAL $3.13B April 28, 2015 1 Annual Growth Rate 1951-2015: 15% *Title of a speech by Julie Riewe, Co-Chief of Asset Management Unit, Division of Enforcement NOTE: The views I express in this speech and the visuals that follow are my own and do not necessarily reflect 1951 1960 1970 1980 1990 2000 2015 the views of Vanguard’s present management.

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Mutual Fund Industry Leaders: Huge Growth in the Number of Funds Then and Now Total Total 9,001 1951 Assets* 2015 Assets 10,000 Rank Fund Name (Millions) Manage r Name (Billions) 3,824 1 M.I.T. $472 Vanguard $2,988 2 Inve stors Mutual 365 Fide lity 1,615 3 Keystone Funds 213 BlackRock 1,230 4 Tri-Continental 209 American Funds 1,216 1,000 564 5 Affiliate d Funds 209 JPMorgan Funds 519 6 Wellington Fund 194 State Stree t 497 160 7 Dividend Shares 186 T Rowe Price 493 103 8 Fundamental Investors 179 Franklin Templeton 480 100 9 State Street Investment 106 PIMCO 375 10 Boston Fund 106 Fede rated 272 Total $2,239 Total $9,686 Percentage of Industry 72% Percentage of Industry 57% Total industry assets: $3.1 billion. Total industry assets: $16.9 trillion *Includes associated funds.

Mutual Fund Expense Ratios Number of Funds—1951 & Today 1951 and 2015 1951 2015 Change Major Mutual Fund Groups Conventional Industry Model 1951 2014 Total No. of Total No. of MIT/MFS (C) 0.42% 1.29% +208% Asse ts Funds Curre nt Asse ts Funds Investors Mutual/Columbia (C) 0.56 1.15 105 Original Name (Millions) Manage d Name (Billions) Managed Eaton Howard/Eaton Vance (SH) 0.64 1.27 99 M.I.T. $472 2 MFS $180 78 Putnam (C) 0.66 1.31 98 Inve stors Mutual 365 3 Columbia 165 116 Fidelity (P) 0.63 1.06 68 Affiliated 209 3 Lord Abbe tt 108 37 T. Rowe Price (SH) 0.50 0.84 68 Wellington 194 1 Vanguard 2,988 140 Eaton & Howard 90 2 Eaton Vance 101 130 Affiliated/Lord Abbett (P) 0.75 1.12 49 Fide lity 64 1 Fide lity 1,615 321 American (P) 0.84 0.99 17 Putnam 52 1 Putnam 81 77 Average 0.62% 1.13% +80% Ame rican 27 2 American 1216 35 New Industry Model T. Rowe Price 1 1 T. Rowe Price 493 116 Wellington/Vanguard (M) 0.55% 0.17 -69% Dre yfus 0.8 1 Dreyfus 248 151 Dollars Total/Ave rage $1,475 1.7 Total/Ave rage $7,195 120 Conventional Model $7.1M $41.1B 5.8x Note: 12 of today’s 20 largest firms did not exist (or did not manage mutual funds) in 1951, New Model $1.1M $5.1B 4.6x including BlackRock, PIMCO, State Street Global, and JP Morgan Ownership types: (C) Conglomerate, (SH) public shareholders, (P) private, (M) mutual 7. 8.

Changing Composition by Asset Class Equity Funds—Less Predictability 1945-2015 More Risk 100% 90% Relative Volatility* 1951-56 2009-15** Difference Money Market 1981 80% 77% Over 1.11 0% 18% +18% 70% 0.95-1.11 34 53 +19 60% Money Market 18% 0.85-0.94 30 16 -14 Bond 22 0.70-0.84 36 10 -24 50% Balanced 8 40% Index Equity 19 Below 0.70 0 4 +4 Active Equity 33 30% 100% 20% Index Funds 2015 *S&P 500 = 1.00 19% 10% **Sample of the 200 largest equity funds.

Equity Fund Redemption Rates U.S. and International Equity Funds Redemptions and Exchanges Out as a Percentage of Average Net Assets 90% 80% International Funds 73%, 1987 80 U.S. Funds Market Timing in International Funds 39%, 2000-2002 50 24% 25% 30 10 6% 1951 1960 1970 1980 1990 2000 2013 0 1985 1995 2005 2013 Source: Investment Company Institute 11. 12.

Challenges Faced by Investors in Active Funds Do Costs Matter? A Powerful Example Growth of $1—1924-2014 $13.69 $10,000 1. High Costs—2% annual cost = 63% of the 50-year return on stocks. 1,000 2. Critical erosion (60%+) of dividend income. $10.99 3. Giant Size—Mutual funds own 33% of U.S. equities. Annual Return “A fat wallet … enemy of superior returns.” 10 S&P 500 +10.3% MIT +9.1% 4. High Turnover—130% of assets (purchases and R2 = 0.95 sales).

5. Marketing—“We make what will sell.” Fund failure 0 Relative Return: MIT / S&P 500: -61% rate 50% per decade. 1.50 1.00 6. Investor (and salesman) focus on past returns. 0.39 0.50 7. Outside ownership of managers (39 of top 50).

0.00 RESULT: Stewardship descends, salesmanship ascends 1924 1940 1950 1960 1970 1980 1990 2000 2014 “The Arithmetic of All-In Investment Expenses” 13. The Miracle of Compounding Long-Term Returns 14. Financial Analysts Journal Without the Tyranny of Compounding Long-Term Costs Actively Growth of $10,000 over a 50-year investment lifetime Managed Fund Index Fund $300,000 Expense Ratio 1.12% 0.06% Impact of Compounding Costs on Wealth: $248,890 Transaction Costs 0.50 0.00 Loss in Capital Accumulation: 75% Cash Drag 0.15 0.00 200,000 Sales Charges/Fees 0.50 0.00 All-In Expenses 2.27% 0.06% Tax Inefficiency 0.75 0.30 100,000 Total Costs 3.02% 0.36% $70,387 Gross Return (assumed) 7.00% 7.00% Net Return 3.98% 6.64% 0 Loss in Annual Return -2.66% 0 10 20 30 40 50 Note: Counterproductive investor behavior (buying high and selling Years low) has historically reduced returns to active fund investors by Index Fund (6.64%) Actively Managed Fund (3.98%) another 1.5-2.0% annually according to Morningstar.

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2.5 1 2.1 1.9 1.8 1.1 0.8 Russel Kinnel Active Index Active Index Active Index Morningstar, August 2010 U.S. Stock Funds Bond Funds Balanced Funds Source: Morningstar. Note: Index fund yields and expenses for Vanguard Admiral share classes.

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Result: Underperformance Lack of Persistence in Performance 80% of Active Funds Underperform Over the Long Term of Active Mutual Funds Percentage of Active Funds Outpeforming Their Benchmarks 15 Years through 2014 Where they ranked 30% Rankings for the 5 years ending 2009 30% in the subsequent 5 years 5-Year Number of Highest Lowest Merged/ 25 Average: 20% Outperform Quintile Return* Funds Quintile Quintile Closed 20 1 Highest 1,091 14% 24% 10% 15 14% 2 High 1,083 12 16 22 3 Medium 1,084 15 13 26 4 Low 1,085 14 10 38 Large Growth Small Growth Mid-Cap Growth Large Blend Small Blend Mid-Cap Blend Large Value Small Value Mid-Cap Value 5 Lowest 1,032 14 9 45 Total 5,375 14% 14% 28% *Excess return vs. benchmark.

Note: Number of failed funds—1,499 Source: Vanguard, Morningstar.

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Aren’t There Mutual Funds That It’s Not Just Me… Fama French, 2010 Avoid These Problems?

“The 3% Solution” Yes, but not very many.

“…[G]oing forward we expect Typical characteristics these funds share: that a portfolio of low cost index 1. Managers, not marketers. funds will perform about as well 2. Reasonable expense ratios. as a portfolio of the top three 3. Low portfolio turnover. percentiles of past active 4. Self-imposed stern limits on size. winners, and better than the rest 5. Interim returns that may vary sharply of the active fund universe.” from the market’s return. 6. Investment professionals own and Source: “Luck versus Skill in the Cross-Section of Mutual Fund Returns,” The Journal of Finance, October 2010 operate the management company.

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Mutual Funds Are the Only Practical 22.

“The Colossal Failure” Option for Individual Investors “[T]he colossal failure of the mutual fund “The vast majority of American industry; resulting from [its] systematic exploitation of individual investors . . . extract[ing] families are sentenced to a lifetime enormous sums from investors in exchange for of investing in the existing mutual providing a shocking disservice. … Thievery, even fund penal system. But if they’re when dressed in the cloak of SEC-approved smart, they’ll do their time in an governance, remains thievery . . . as the powerful financial services industry exploits vulnerable index fund.” individual investors.”

David Swensen, manager of Yale University’s John Bogle endowment fund Grant’s “Great Debate” April 7, 2015 23. 24.

Enter Vanguard Strategy Follows Structure MUTUAL STRUCTURE INDUSTRY STRUCTURE “The Vanguard plan actually furthers the objectives [of STRATEGY Long-term result STRATEGY Long-term result the Investment Company Act of 1940] by ensuring that Prioritize Prioritize fund Increasing Decreasing management the Funds’ directors … are better able to evaluate the shareholders market share company market share quality of services rendered to the funds … improved Leads Leads Leads Leads disclosure to shareholders … promotes savings from to to to to Pricing Impact to manger Pricing Impact to manger economies of scale … clearly enhances the Funds’ Higher costs for independence … provides them with conflict-free control Lower costs for Lower revenue fund owners Higher revenue fund owners and no profit and profit over distribution … and promotes a healthy and viable (e.g., 108 bps) fund complex within which each fund can better Leads Leads Leads Leads prosper.” (Unanimous decision, 1981) to to to to Fund Focus Impact to investors Greater Risks Impact to investors Leads For Fund Leads Lower profits Index Funds Higher profits to to Equity 5 bps for fund Owners to for fund Bond 8 bps investors Offset Costs investors 25. 26.

Vanguard Cash Flow Growth Vanguard’s Market Share of Stock and Bond Funds Cumulative Net Cash Flow into Vanguard Funds 20% $1,800 19.7% $1.6T 1,600 18 Previous Industry Leaders 14.6% 1,400 16 MIT 15% (1924-1953) 1,200 $993B 14 IDS/Columbia 14% (1954-1978) Fidelity 13%(1979-2005) 11.8% Billions of Dollars 1,000 Vanguard 20% (2015e) 800 9.8% $547B 10 400 6.6% 6.6% 5.9% $106B 6 200 4.1% -$250M $8B 0 4 -200 2 1974 1980 1985 1990 1995 2000 2005 2010 2015 5-Year Average 0 Annual Cash -0.7% 26.2% 20.0% 15.8% 13.9% 7.3% 7.9% 7.0% 1974 1985 1995 2005 2015 Flow/Assets 27.

Vanguard’s Key Strategy: Indexing 28.

Vanguard Dominating Industry Cash Flow 1975—First Index Investment Trust Mutual Fund Industry Net Cash Flow First Quarter 2015 $100 Initial 80 Reaction Industry Total Vanguard 60 $63 Billion accounted for Vanguard 133% of the +$83 Billion mutual fund 20 industry’s net cash flow in 1Q 2015 All Other Firms -$20 Billion -20 *Name changed to -40 Vanguard 500 Index Fund in 1980.

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U.S. Equity Fund Cumulative Net Cash Flow, 2006-2014 Index Funds Dominate Vanguard’s Assets Passive Index Funds versus Actively Managed Funds Percentage of Assets Under Management Cumulative Net Cash Flow into Index and Active Mutual Funds and ETFs 100% 3% 9% $1,000 90% 15% Index +$917 Billion 23% 26% 800 80% 19% Active Billions of Dollars 70% 21% 400 60% Active 200 50% 56% Virtual Index 40% 82% Index 72% -200 30% 56% -400 20% 10% -600 18% -$597 Billion 0% -800 Equity Bond Balanced Total 2006 2010 2014 Note: “Virtual Index Fund” – R-Squared of 0.96 or higher relative to its best-fit index. Source: Strategic Insight Simfund 31. 32.

Indexing Market Share Growth of Equity Index Fund Assets $4.5T Index Strategies as a Percentage of Total U.S. Institutional Equity Assets $10,000,000 $6.4 Trillion 40% Active $3.2 Trillion 1,000,000 $10.6 Trillion Mutual Funds 37% Index $1.1T $1.5T Pension Funds 100,000 31% Millions of Dollars $49B 10,000 26% 1,000 20 Total Index 18% 100 Fund Assets Total Indexing Assets and Market Share 1995 2015 Annual Increase 2004: 24% 10 TIFs* $48B $1.63T +19% 2014: 32% ETFs $1B $1.68T +45% Total $49B $3.31T +23% 2004 2009 2014 1975 1985 1995 2005 2014 Source: Strategic Insight Simfund, Empirical Research Partners 33. 34.

“What Have They Done to My Song, Ma?”

A Speech Title Sums It Up Enter the Exchange-Traded Fund (ETF) First Index Mutual Fund (1974)—Principles Convergence! • Own the U.S. stock market The Great Paradox: Just as Active Fund • Diversify to the Nth degree • Minimize transaction costs Management Becomes More and More Like • Tiny expense ratio—500 Index: 0.05% (Admiral) Passive Indexing, So Passive Indexing Becomes • Bought to be held “forever” (redemption rate 10%) More and More like Active Fund Management Exchange-Traded Index Funds (1993)—Principles John C. Bogle • Pick your own index (1,100 now available) “The Art of Indexing” Conference • Diversify within sector you chose Washington, DC • Lower expenses … but not too low (0.50%) September 30, 2004 • Bought to be traded (average annual turnover of large ETFs: 1244%) 35. 36.

ETF Turnover ETFs—The New Way to Speculate 2014 Dollar Turnover as a Percentage of Average Annual Assets SPDR S&P 500 ETF 2724% 2014 Trading Volume iShares Core S&P 500 337% 100 Largest Stocks: $18.6 Trillion iShares MSCI EAFE 524% Asset-Weighted 100 Largest ETFs: $15.7 Trillion Turnover, Vanguard Total Stock Market ETF 144% 20 Largest ETFs: Vanguard FTSE Emerging Markets ETF 319% 1244% 2014 Turnover Rate 100 Largest Stocks: 179% Vanguard S&P 500 ETF 274% 100 Largest ETFs: 1428% iShares Russell 2000 4274% SPDR Gold Shares 725% 0 200 400 800 2600 4200% Costs and Indexing— 37. 38.

What’s a Competitor to Vanguard to Do?

More Important than Ever What’s a race car driver to do when he’s in last 10% position?

Historical Prospective 8% Returns Active Index • Increase speed—i.e., improve performance, more 4.5% Gross Return 9% 4% 4% 6% 2% Costs -1 -2 -0.05 aggressive marketing, more money to distributors Net Return 8% 2% 3.95% (a la life insurance) 4% • Reduce friction—i.e., cut fees, cut staff, cut research 4.5% 5% • Copy the car in front—i.e., more indexing, less 2% Dividend Yield innovation 0% Earnings Growth • Get a new car—i.e., focus on other lines of business, -3% Speculative Return -2% recordkeeping, benefit plans, venture capital, -4% Gross Return 9% Gross Return 4% limousine services, etc.

Historical Next 10 Years ?

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The “Golden Rule” of the ‘40 Act Copernicus Turned Upside-Down Put the Shareholder First!

Average Mutual Fund Group Total Net Assets $25 Billion “… the national public interest and the interest of investors are adversely affected … when investment Why isn’t the sun—500 times the size of the planet—at the companies are organized, operated [and] managed … in center of this universe? the interest of directors, officers, investment advisers … [or] underwriters … rather than in the interest of … such companies’ security holders …” Investment Company Act of 1940, Section 1.B.2. Average Fund Management Company Total Net Assets $50 Million 1993 data from Bogle on Mutual Funds: New Perspectives for the Intelligent Investor 41. 42.

Tiny Transaction Transforms Giant Industry It Wasn’t Supposed to Be That Way… Transaction: Owners of ISI (book value $300,000) sold the For Paul Cabot, president of State Street Investment Trust, the manager to other investors for 14 times book value ($4.2 million). private ownership of fund managers was essential. Indeed it represented a moral imperative for him, and he sharply criticized SEC v. Insurance Securities, Inc., 1958 firms that would sell out to insurance companies and other financial institutions.* In 1971, he recalled the negotiations over The Ninth Circuit Court of Appeals ruled that ISI could sell it’s the Investment Company Act of 1940: “Both the SEC and our fiduciary obligation to its fund shareholders, opening the industry committee agreed that the management contract floodgates to IPOs, mergers, “trafficking” in management between the fund and the management group was something that contracts, and acquisitions of fund management companies. belonged … to the fund … and therefore the management group had no right to sell it … or to make money on the disposition of By the mid-1960s, a score of fund management firms went public, this contract … the fiduciary does not have the right to sell his including industry leaders Wellington, Vance Sanders, Dreyfus, job to somebody else at a profit.” Franklin and Putnam. Later, MFS, T. Rowe Price, State Street, American Century, Oppenheimer, Alliance, AIM, Delaware, and *In 1982, the private owners of State Street Management sold many others. their company to the (ironically then-mutual) Metropolitan Life Insurance for a profit of $100 million.

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Ownership of 50 Largest Mutual Fund Management Companies—2015 Public Ownership and Professional Organizations Privately Owned (10) Plus Mutual (1) From my 1971 speech to the partners of 11 Wellington Management Company: (Includes 3 largest firms) I reveal an ancient prejudice of mine: All things considered ... it is undesirable for professional enterprises to have public stockholders ... The pressure for earnings and earnings growth engendered by public ownership is antithetical to Conglomerate Publicly Owned the responsible operation of a professional 28 11 organization.

Total Firms with Public Ownership: 39 Note: Wellington, now private, was then publicly-owned.

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Fiduciary Duty A Precept as Old as Holy Writ What’s To Be Done?

No man can serve two masters: for 1. Reduce Conflicts either he will hate the one, and love the other; or else he will hold to the 2. Disclose Conflicts one, and despise the other.

Matthew 6:24 47. 48.

Reducing Conflicts: Structural Changes Sunlight—Disclosing Conflicts • Funds’ board chairman must be an independent Improvements in Prospectus Disclosure director* All investors should have access to these data: • Board must have independent staff, reporting to • Redemption Rate—Redemptions + exchanges out as a percentage of average fund assets the chairman* • Fund expenses—percentage of investment income • Regulation should move its focus from individual • Fund return (time-wtd) vs. investor return (asset-wtd) funds (industry, 1924-1940) to fund complexes • Long-term vs. short-term capital gains distributions (today’s industry) • Turnover—Total purchases + total sales as a percentage of • Ultimately, mutualization (full or partial) average fund assets • All-in compensation of 5 highest-paid fund officers *Applicable only to managers supervising assets of long-term funds of (comprehensive) $25 billion or more, and operating 20 or more funds. In 2015, the 50 • Investment Advisory Fees—Rates and dollars (10-year largest fund managers have aggregate assets of $12.4 trillion, 86% of history of each) Jones v. Harris Associates the industry’s long-term assets.

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What’s All This about “Basis Points?” High-Priced Index Funds and Fiduciary Duty Jones v. Harris Associates What were directors of these funds thinking?

Brief for John C. Bogle as Amicus Curiae S&P 500 Index Funds with Expense Ratios of 0.40% or More in Support of Petitioners Expense Fund Assets Ratio Principal Large Cap S&P 500 Index $4.7 B 0.74% It is important to distinguish between the already-high rates (as a percentage of assets) that advisers charge and the even more Voya US Stock Index 4.6 B 0.66 excessive dollar amounts that are produced by those fee rates. It Columbia Large Cap Index 3.7 B 0.83 was the huge increase in mutual fund assets and, therefore, the MM S&P 500 Index 3.6 B 0.68 amount of mutual fund fees, that concerned the SEC in 1966, since Dreyfus S&P 500 Index 2.9 B 0.50 the cost of providing advisory services (essentially, managing an JP Morgan Equity Index* 1.9 B 1.20 investment portfolio) rises far more slowly than the fees generated Total (87 Funds) $19.3 B 0.85% by taking a percentage of the increase in assets . Yet courts have generally acceded to the advisers’ desire to frame any debate about Vanguard 500 Index-Admiral Shares $143 B 0.05% fees in percentage—not dollar—terms, thereby giving advisers a -Institutional Plus Shares $85 B 0.02% license to charge fees that are unjustifiable by any standard. * “A” series shares carry an expense ratio of 0.45% and a sales load of 5.25% 51. 52.

The Wisdom of Warren Buffett Corporate Pensions: The Elusive 8% Corporate pension funds make unreasonable assumptions about future returns About Mutual Fund “Independent” Directors: Pension de-risking and high expected returns are not compatible.

“Companies are not looking for Dobermans on the Example: IBM board; they are looking for cocker spaniels. Then Asset Required Reasonable they make sure their tails are wagging.” Asset Allocation Allocation Return Assumptions Bonds 56% 3.75% 3% Stocks 25 13.6 4 “Negotiating with oneself seldom produces a Others (Hedge Funds, 19 18.5 10 barroom brawl.” Private Equity, etc.)

Total/Gross Return 100% 9.0% 4.6% Less Investment Costs -1.0% -1.0% Net Return 8.0% 3.6% Warren Buffett 53. 54.

The Road to Fiduciary Duty The Wisdom of Adam Smith 1. Price Competition “Consumption is the sole end and purpose of all • Investor experience production; and the interest of the producer ought • Investor awareness to be attended to only so far as it may be • Complete disclosure necessary for promoting that of the consumer. The 2. Awaken the Independent Directors maxim is so perfectly self-evident that it would be • Awareness • Board structure absurd to attempt to prove it.”

• Mutualize?

3. Lawmakers/Regulators The Wealth of Nations • DOL—Retirement Plans 1776 • SEC—Mutual Funds • Dodd-Frank Believe me—WE WILL GET THERE!