当今共同基金行业：“冲突，无处不在的冲突”

This is the html version of the file http://johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28_Print.pdf. Google automatically generates html versions of documents as we crawl the web.

Tip: To quickly find your search term on this page, press Ctrl+F or ⌘-F (Mac) and use the find bar.

2.

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 Bond $9.9T 3.7T 1,000 2.5T Money Market United States Securities Balanced TOTAL 740B $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.

3. 4.

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 Investors Mutual 365 Fidelity 1,615 3 Keystone Funds 213 BlackRock 1,230 4 Tri-Continental 209 American Funds 1,216 1,000 5 Affiliated Funds 209 JPMorgan Funds 519 6 Wellington Fund 194 State Street 497 7 Dividend Shares 186 T Rowe Price 493 103 8 Fundamental Investors 179 Franklin Templeton 480 9 State Street Investment 106 PIMCO 375 10 Boston Fund 106 Federated 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 MIT/MFS (C) 0.42% 1.29% +208% Total No. of Total No. of Assets Funds Current Assets Funds Investors Mutual/Columbia (C) 0.56 1.15 105 Original Name (Millions) Managed 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 Investors Mutual 365 3 Columbia 165 116 Fidelity (P) 0.63 1.06 68 Affiliated 209 3 Lord Abbett 108 37 T. Rowe Price (SH) 0.50 0.84 68 webcache.googleusercontent.com/search?q=cache:WFzPAC40e0kJ:johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28… 1/9 Wellington 194 1 Vanguard 2,988 140 Affiliated/Lord Abbett (P) 0.75 1.12 49 Eaton & Howard 90 2 Eaton Vance 101 130 Fidelity 64 1 Fidelity 1,615 321 American (P) 0.84 0.99 17 Putnam 52 1 Putnam 81 77 Average 0.62% 1.13% +80% American 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% Dreyfus 0.8 1 Dreyfus 248 151 Dollars Total/Average $1,475 1.7 Total/Average $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% Money Market 1981 Relative Volatility* 1951-56 2009-15** Difference 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 50% 0.70-0.84 36 10 -24 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.

0% 1945 1951 1960 1970 1980 1990 2000 2015 9. 10.

Then, Long-Term Shareholders, Now . . . ? Redemption Rates Equity Fund Redemption Rates U.S. and International Equity Funds Redemptions and Exchanges Out as a Percentage of Average Net Assets 90 % 80 % 73%, 1987 International Funds U.S. Funds Market Timing in International Funds 39%, 2000-2002 50 24% 25% 30 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 $ 10,000 $13.69 1. High Costs—2% annual cost = 63% of the 50-year return on stocks. 1,000 $10.99 2. Critical erosion (60%+) of dividend income.

3. Giant Size—Mutual funds own 33% of U.S. equities. Annual Return S&P 500 +10.3% “A fat wallet … enemy of superior returns.” 10 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 webcache.googleusercontent.com/search?q=cache:WFzPAC40e0kJ:johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28… 2/9 13. 14.

“The Arithmetic of All-In Investment Expenses” The Miracle of Compounding Long-Term Returns 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 $70,387 Total Costs 3.02% 0.36% 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.

15. 16.

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.

17. 18.

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/ Average: 20% Outperform Quintile Return* Funds Quintile Quintile Closed 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 d e d e n th w lu n th w lu nd th w lue 5 Lowest 1,032 14 9 45 le o a le o a o a B r V B r V r e G e p G p ll Ble ll V g r e g r a p a a ll G a Total 5,375 14% 14% 28% g a a r -C -C Sm Sm La La -C Sm La *Excess return vs. benchmark.

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

webcache.googleusercontent.com/search?q=cache:WFzPAC40e0kJ:johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28… 3/9 19. 20.

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.

Source: “Luck versus Skill in the Cross-Section of Mutual Fund Returns,” 6. Investment professionals own and The Journal of Finance, October 2010 operate the management company.

Mutual Funds Are the Only Practical 21. 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 Long-term result Long-term result “The Vanguard plan actually furthers the objectives [of STRATEGY STRATEGY Prioritize the Investment Company Act of 1940] by ensuring that Prioritize fund Increasing Decreasing management shareholders market share market share the Funds’ directors … are better able to evaluate the company quality of services rendered to the funds … improved Leads Leads Leads Leads to to to to disclosure to shareholders … promotes savings from 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 Leads Index Funds Higher profits For Fund Lower profits to to Equity 5 bps for fund Owners to for fund Bond 8 bps investors Offset Costs investors webcache.googleusercontent.com/search?q=cache:WFzPAC40e0kJ:johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28… 4/9 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) s r 1,000 Fidelity 13%(1979-2005) 11.8% lla 12 o Vanguard 20% (2015e) 800 9.8% fD $547B 10 so 600 n 400 6.6% 6.6% Billio 5.9% $106B 6 4.1% -$250M $8B 0 4 -200 2 1974 1980 1985 1990 1995 2000 2005 2010 2015 5-Year Average 0 -0.7% 26.2% 20.0% 15.8% 13.9% 7.3% 7.9% 7.0% 1974 1985 1995 2005 2015 Annual Cash Flow/Assets Vanguard’s Key Strategy: Indexing 27. 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 $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 -$20 Billion *Name changed to -40 Vanguard 500 Index Fund in 1980.

29. 30.

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% $ 1,000 9% 90% 15% Index +$917 Billion 23% 26% 800 80% 19% Active s 600 r 70% lla 21% o 400 60% fD Active so 200 50% n 56% Virtual Index 40% 82% Index Billio 72% -200 30% 56% -400 20% -600 10% 18% -$597 Billion 0% -800 Equity Bond Balanced Total 2006 2010 2014 Source: Strategic Insight Simfund Note: “Virtual Index Fund” – R-Squared of 0.96 or higher relative to its best-fit index.

31. 32.

Indexing Market Share Growth of Equity Index Fund Assets $4.5T $ 10,000,000 Index Strategies as a Percentage of Total U.S. Institutional Equity Assets $6.4 Trillion 40 % $3.2 Trillion Active 1,000,000 $10.6 Trillion Mutual Funds 37% Index $1.1T $1.5T Pension Funds 100,000 31% s r $49B webcache.googleusercontent.com/search?q=cache:WFzPAC40e0kJ:johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28… 5/9 30 lla o 10,000 26% fD so n 1,000 Millio Total Index 18% 100 Fund Assets Total Indexing Assets and Market Share 1995 2015 Annual Increase 2004: 24% 10 TIFs* $48B $1.63T +19% ETFs $1B $1.68T +45% 2014: 32% Total $49B $3.31T +23% 10 1 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 • Diversify to the Nth degree The Great Paradox: Just as Active Fund • 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%) • Bought to be traded (average annual turnover of September 30, 2004 large ETFs: 1244%) 35. 36.

ETF Turnover ETFs—The New Way to Speculate 2014 Dollar Turnover as a Percentage of Average Annual Assets 2724% 2014 Trading Volume SPDR S&P 500 ETF 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 Gross Return 9% 4% 4% 6% 4.5% -1 aggressive marketing, more money to distributors 2% Costs -2 -0.05 Net Return 8% 2% 3.95% (a la life insurance) 4% • Reduce friction—i.e., cut fees, cut staff, cut research webcache.googleusercontent.com/search?q=cache:WFzPAC40e0kJ:johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28… 6/9 2% 4.5% 5% • Copy the car in front—i.e., more indexing, less 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 ?

39. 40.

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 Why isn’t the sun—500 times investors are adversely affected … when investment 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.

43. 44.

Ownership of 50 Largest Mutual Fund Public Ownership and Professional Organizations Management Companies—2015 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.

Note: Wellington, now private, was then publicly-owned.

Total Firms with Public Ownership: 39 webcache.googleusercontent.com/search?q=cache:WFzPAC40e0kJ:johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28… 7/9 45. 46.

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.

49. 50.

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

Jones v. Harris Associates S&P 500 Index Funds with Expense Ratios of 0.40% or More Brief for John C. Bogle as Amicus Curiae 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 Voya US Stock Index 4.6 B 0.66 percentage of assets) that advisers charge and the even more 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% webcache.googleusercontent.com/search?q=cache:WFzPAC40e0kJ:johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28… 8/9 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!

webcache.googleusercontent.com/search?q=cache:WFzPAC40e0kJ:johncbogle.com/wordpress/wp-content/uploads/2015/07/Bogle_SEC_2015-04-28… 9/9