博格heads 15演讲

Bogleheads XV!

The Undisputed Champion of the Long Run Indexing Is Capitalism at its Best John C. Bogle Philadelphia, PA September 29, 2016 “ALL THAT GLITTERS” . . .

Two Gold Medals National Institute of Social Sciences Gold Medal for Distinguished Service November 19, 2015 Pennsylvania Society Gold Medal for Distinguished Achievement December 10, 2016 BASICALLY, FOR “SPREADING THE WORD” . . .

I. Spreading the Word My 65-Year Career in the Fund Industry 6 How Many Hits, How Many Eras?

(“Follow the Money”) An Industry that Sells What It Makes •1924-59. The mutual fund industry in its promising formative era An Industry that Makes What Will Sell •1960-64. Public ownership of advisors—The New Paradigm •1965-69. The Go-Go Era—Equity junk •1970-74. The rise and fall of the Nifty Fifty •1975-90. Money market funds and bond funds—a new industry •1991-01. The Information Age and the rise of technology funds •1995-07. The TIF (Traditional Index Fund) Era •2008-15. The ETF (Exchange-Traded Index Fund) Era Whats Next?

•2015-25. The return to a new normalcy—The triumph of TIF indexing I’VE SEEN EACH ERA, AND EACH ERROR, DID MY BEST TO BUILD A BETTER INDUSTRY, AND PREACH ABOUT MY CONVICTIONS . . .

Lin-Manuel Miranda at the White House introducing his hit musical “Hamilton” “… All in the Strength of His Writing, He Embodies the Word’s Ability to Make a Difference” How Much has Vanguard Saved Investors? Try $1 Trillion How Much has Vanguard Saved Investors? Try $2.1 Trillion $2.115 Trillion 2,000 Earnings on Invested Savings 1,100 Future Savings 1,500 "The Vanguard $1.015 Trillion 1,000 Effect": Competitors' Lower Expense Ratios 500 500 Lower Trading Costs 200 200 140 140 Lower Expense Ratios 175 175 SOURCE: OUR SHAREHOLDERS OWN THE NATION’S SECOND MOST IMPORTANT PRIVATE COMPANY . . .

“If the trumpet give an uncertain sound, 11 who shall prepare himself to the battle?” -St. Paul, First Corinthians JCB 15 10 Papers BUT MY BOOKS OVERWHELM MY ACADEMIC ESSAYS . . .

The Little Book of Common Sense Investing The #1 best-seller on Amazon in the Mutual Funds category since its release on March 5, 2007, some 3,471 out of 3,496 days. Sales so far: 216,000 Why? Short, simple, and persuasive.

Number of Amazon Reviews: 463, 72 so far in 2016: 5 Star 58 4 Star 10 3 Star 3 2 Star 0 1 Star 1 Total 72 BUT LBCSI IS HARDLY ALL . . .

80,000 Bogle Book Sales 13 CUMULATIVE SALES Little Book of Common 2012-2016 Sense Investing 70,000 Common Sense on Mutual Funds 60,000 Clash of the Cultures 50,000 Others 40,000 Cumulative Sales since 1993: Bogle on Mutual Funds: 30,000 Little Book: 216,079 20,000 Common Sense on Mutual Funds (all editions): 115,839 10,000 Clash of the Cultures: 35,341 2012 2014 2016 Enough.: 91,468 Bogle Books Total: 895,000 SPEAKING OF “ENOUGH” . . .

A year ago, we laughed … Today?

NOW LET’S TURN TO VANGUARD’S GROWTH . . .

II. The Domination of Vanguard (And the 40th Anniversary of the IPO of “First Index Investment Trust”) Vanguard Dominates Industry Cash Flow Mutual Fund Industry Net Cash Flow Sep. 2015 through Aug. 2016 $ 300 During the past year, Vanguard has 200 Industry Total accounted for $178 Billion 150 151% of the mutual 100 Vanguard fund industry’s net +$269 Billion cash flow.

0 1 All Other Firms -50 -$91 Billion -100 -150 RECORD CASH INFLOWS . . .

Vanguard Cash Flow, 1988 – 2015 Annually, in billions $ 350 Index Stock and Bond Funds $301B* 300 Active Stock and Bond Funds Money Market Funds Billions of Dollars $100B $58B $57B $46B $18B $4B -50 1988 1995 2000 2005 2010 2016* *Annualized based on actual data through 8/2016 “OFF THE CHARTS”—LITERALLY . . .

Where’s Vanguard?

THE HISTORY OF THE RISE OF VANGUARD . . .

The Competition 19 Assets of Largest U.S. Mutual Fund Managers, 2000-2016 $ 4000 VGD vs. FID +$1.8 T Vanguard: $3.5 T Billions of Dollars Fidelity: $1.7 T 1500 BlackRock: $1.4 T VGD vs. FID -$204 B 1000 American: $1.3 T F: $765 B V: $561 B State Street: $572 B 500 B: $270 B A: $334 B S: $154 B 2000 2005 2010 2016 RESULT: OUR MARKET SHARE GROWTH CONTINUES . . .

Vanguard’s Market Share of Stock and Bond Funds, 1974-2016 25% The Momentum — “Staying the Course” 22.8% 14.6% The Hard Times 11.8% 9.8% 6.6% 6.6% 5.9% 4.1% 1974 1985 1995 2005 2016 TO AN UNPRECEDENTED DOMINANCE . . .

Fund Industry Market Share Leaders Peak Leader Years Peak Assets Market Share 1935(e)-195 $554 M 15.3% MFS 2 (1952) (1950) $7.6 B 15.8% IDS 1953-1982 (1972) (1964) $645 B 13.8% Fidelity 1983-2003 (1999) (1999) 2004- $3.5 T 22.8% Vanguard Present (8/2016) (8/2016) The Triumph of Indexing Growth of Equity Fund Assets—Index vs. Active $10,000,000 $6.3 Trillion Index $3.7 Trillion 1,000,000 $10.0 Trillion Active Index Share 100,000 37% Millions of Dollars 10,000 1975 $39 Billion 1995 2005 $14 Million $1.1 Trillion $4.0 Trillion 1,000 $39 Billion $49 Billion $779 Billion $1.2 Trillion $4.8 Trillion Index Share Index Share Index Share 4% 16% 0% 1975 1985 1995 2005 2016 THREE FIRMS DOMINATE INDEX CASH FLOW . . .

The Triumph of Indexing: Cumulative Net Cash Flow 2009-2016 $2,000 The Big Three Indexers (Vanguard, BlackRock, State Street) 1,500 The Rest of the Industry 1,000 Net Cash Flow 2009-2016 Billions of dollars 500 $1.7 T -$231 B -500 -1,000 2009 2012 2016 AND IT MAKES THE DIFFERENCE . . .

Index Funds Make the Difference Index Active Total Manager Index % Assets Assets Assets Vanguard $2.4 T $1.1 T $3.5 T 70% Fidelity $236 B $1.4 T $1.7 T 14% BlackRock $936 B $450 B $1.4 T 68% American $0 $1.3 T $1.3 T 0% State Street $463 B $109 B $572 B 81% III. The Fund Industry Changes (A Review of my 65th Anniversary in the Mutual Fund Industry) I Was There (And I Am Here!) A Tiny Industry Grows into a Behemoth $10,000 TOTAL ASSETS August 2016 1981 Equity $10.0T 58% MMF + Bond Bond 4.0T 23 1,000 83% Money Market 2.6T 15 1972 Balanced 715B 4 Equity TOTAL $17.4T 100 87% 2016 Billions 1951 Index Funds TOTAL ASSETS Equity 37% of Equity December 1951 78% Fund Assets 10 Equity $2.45B 78% Balanced 680M 22 TOTAL $3.13B Annual Growth Rate 1951-2016: 14% 1951 1960 1970 1980 1990 2000 2016 INDUSTRY LEADERSHIP CHANGES . . .

Changes in Mutual Fund Leadership: 27 Then and Now Total Total 1951 Assets* Assets Rank Fund Name (Millions) 2016 (Billions) 1 M.I.T. $472 Vanguard $3,479 2 Investors Mutual 365 Fidelity 1,674 3 Keystone Funds** 213 BlackRock * 1,230 4 Tri-Continental 209 American Funds 1,216 5 Affiliated Fund 209 State Street Global* 519 6 Wellington Fund 194 JPMorgan Funds * 497 7 Dividend Shares 186 T Rowe Price 493 8 Fundamental Investors 179 Franklin Templeton 480 9 State Street Investment 106 PIMCO * 375 10 Boston Fund ** 106 Dimensional * 272 Total $2,239 Total $10,236 Percentage of Industry 72% Percentage of Industry 60% Total industry assets: $3.1 billion. Total industry assets: $17.4 trillion *Includes associated funds. ** No longer in business. ***New leaders.

DESPITE ECONOMIES OF SCALE, EXPENSE RATIOS RISE AND EXPENSE SOAR . . .

Mutual Fund Expense Ratios 1951 and 2016 28 1951 2016 Change Conventional Industry Model MIT/MFS (C) 0.42% 1.24% +195% Investors Mutual/Columbia (C) 0.56 1.11 98 Eaton Howard/Eaton Vance (SH) 0.64 1.23 92 Putnam (C) 0.66 1.29 95 Fidelity (P) 0.63 0.89 41 T. Rowe Price (SH) 0.50 0.78 56 Affiliated/Lord Abbett (P) 0.75 1.01 35 American (P) 0.84 0.96 14 Average 0.62% 1.06% +72% New Industry Model Wellington/Vanguard (M) 0.55% 0.15 -73% 1951 Assets 1951 Expenses 2016 Assets 2016 Expenses Conventional Model (above firms) $1B $7M $4.0 T $25 B New Model -- -- $3.5 T $4 B Ownership types: (C) Conglomerate, (SH) public shareholders, (P) private, (M) mutual AN EARLY FLAW CHANGES THE CHARACTER OF THE INDUSTRY . . .

A Funny Thing Happened in 1958: Public Ownership of Fund Management Companies No man can serve two masters, for either he will hate the one, and love the other; or else hold to the one and despise the other. Luke 16-13 YET THAT’S THE INDUSTRY’S PRINCIPAL OWNERSHIP STRUCTURE . . .

Ownership of 50 Largest Mutual Fund Management Companies—2016 Privately Owned (10) Plus Mutual (1) (Includes 3 largest firms) Conglomerate: 28 Publicly Owned: 11 Total Firms with Public Ownership: 39 Note: Firms with Public Ownership in 1951: 1 BUT LOTS OF OTHER BIG CHANGES. NONE COMPARE WITH THE RISE OF INDEXING . . .

The Rise of the Index Fund Equity Index Fund Assets Annual Increase 1996-2 2009- 1976-2 1976 1986 1996 2016 008 2016 016 TIFs* $14M $591M $83B $1.88T +15% +20% 13% ETFs $0 $0 $2B $1.86T +54% +21% n/a Total $14M $591M $85B $3.74T +22% +21% 15% *Traditional Index Funds THERE IS A DIFFERENCE . . .

Yes, There Is a Difference Traditional Index Funds vs. Exchange-Traded Funds First Index Mutual Fund (1974)—Principles •Own the U.S. stock market •Diversify to the Nth degree •Minimize transaction costs •Tiny expense ratio—500 Index: 0.05% (Admiral) •Bought to be held forever (redemption rate 10%) Exchange-Traded Index Funds (1993)—Principles •Pick your own index (1,900 now available) •Diversify within sector you chose •Lower expenses … but often not too low (0.50%) •Fringe ETFs BUT A WIDE RANGE OF ETF STRATEGIES . . .

All ETFs Are Not the Same Assets, Institutional Ownership, and Turnover Largest Total Institutional Annualized Annualized ETF Sponsors Assets Ownership Turnover Turnover % BlackRock $932 B 65% $5,225 B 631% Vanguard 574 43 973 201 State Street Global 462 60 9,288 2,243 Total $1,968 B 56% $15,486 B 898% Most Active ETF Sponsors ProShares $27 B 22% $974 3,870% Direxion 10 6 503 5,755 VelocityShares 4 6 357 11,445 Total $40 B 23% $1,833 B 4,952% BUT IT IS THE TIF THAT PROVIDES MAXIUMUM CONSISTENCY FOR THE LONG-TERM INVESTOR . . .

Old Times or New, The Durability of Index Fund Superiority 1945-1975 1985-2015 Presentation to Paper Submitted to Vanguard Board Financial Analysts Journal September 18, 1975 September 28, 2015 Average S&P 500 Average S&P 500 Equity Index Large-Cap Index Fund Fund Annualized Return 9.7% 11.3% 9.6% 11.2% Index Advantage -- 1.6% -- 1.6% Cumulative Return 1539% 2402% 1548% 2494% Index Advantage --- 963% --- 946% Standard Deviation 16.4% 18.6% 16.8% 17.3% Sharpe Ratio 0.38 0.42 0.39 0.48 R-Squared 0.96 1.00 0.99 1.00 THE PERFORMANCE EDGE OF THE TRADITIONAL INDEX FUND HAS BEEN CONSITENT. CAN YOU DO BETTER? . . .

IV. Beating the Market?

Do You Like These Odds?

Percentage of Active Funds Outpeforming Their Index Benchmarks 15 Years through 8/2016, Adjusted for Survivor Bias 35% Average: 11% Outperform 30% 30% 25% 20% 15% 10% 7% 5% 0% Large Large Large Mid Mid Mid Small Small Small Blend Growth Value Blend Growth Value Blend Growth Value Source: Vanguard, Morningstar.

“BUT I’LL JUST PICK ABOVE-AVERAGE FUNDS” . . .

Equity Fund Returns: No, Pal, The Past Is Not Prologue. RTM Where they ranked Rankings for the 5 years ending 2010 in the subsequent 5 years 5-Year Number of Highest Lowest Merged/ Quintile Return* Funds Quintile Quintile Closed 1 Highest 1,100 16% 24% 13% 2 High 1,111 15 16 17 3 Medium 1,105 13 15 25 4 Low 1,105 16 11 30 5 Lowest 1,105 15 9 40 Total 5,526 15% 15% 25% *Excess return vs. benchmark.

Note: Number of failed funds—1,376 “Relative Predictability” Dominates Vanguard’s Asset Base 91% of Vanguard’s Assets Have High Relative Predictability (Average pre-cost returns . . . superior post-cost returns) Active Funds Virtual 9% Index Funds 19% Index Funds 72% Note: “Virtual Index Fund” – R-Squared of 0.96 or higher relative to best-fit index.

YES!

Investment Company of America Expense Ratios and Sales Loads Net Assets Expense Front-End Deferred Share Class Inception Year ($ Million) Ratio Load Load A 1934 $57,317 0.58% 5.75% B 2000 79 1.34 5.00% C 2001 1,682 1.39 1.00 F1 2001 1,894 0.67 F2 2008 3,515 0.41 R1 2002 84 1.40 R2 2002 637 1.41 R2E 2014 11 1.14 R3 2002 922 0.95 R4 2002 1,053 0.64 R5 2002 618 0.35 R5E 2015 0.01 0.46 R6 2009 6,313 0.30 American Funds Total $1.2 T 0.96% 4.45% 0.03% BUT I BELIEVE IN THE “VALUE” FACTOR . . .

DFA Large-Cap Value / S&P 500 1.4 1.3 Annual Returns 1993-2000 1.2 DFA +11.9% S&P +19.9% 1.1 Annual Returns 1 2007-2016 DFA +5.8% 0.9 S&P +7.0% Annual Returns Annual Returns 0.8 2000-2007 Full Period DFA +13.7% 1993-2016 0.7 S&P +2.1% DFA +9.9% S&P +9.1% 0.6 1993 2000 2010 2016 MEANWHILE, BACK AT THE RANCH . . .

Wellington Fund versus Average Balanced Fund 1929-2016 1.6 1929-1966 1967-1978 1979-2016 Stolid Returns The Fall The Renaissance From Grace (then eroding starting 1963) 1.4 1.2 1.0 Wellington outperforming 0.8 Avg. Balanced Fund outperforming 0.6 1929 1940 1950 1960 1970 1980 1990 2000 2010 8/2016 Annual Wellington 6.8% 3.8% 11.4% 1929- 8.3% Return Avg. Balanced Fund 6.9 6.4 8.9 2016 7.7 -0.1% -2.6% +2.5% +0.6% LET’S NOT FORGET THE FOUNDER, MY MENTOR AND FRIEND . . .

Walter L. Morgan, Founder of Wellington Management V. Looking Ahead Looking Ahead—Perspective 47 Cumulative Investment and Speculative Returns, 1900-2016 Value of Initial $1 $ 100,000 Annual Cumulative Investment Return Return Initial Dividend Yield + 10-Year Earnings Growth 9.0% 10,000 Cumulative Speculative Return Annualized Impact of P/E Change 1,000 10 Annual Return 0.3% 1900 1920 1940 1960 1980 2000 2016 IN THE LONG RUN, FUNDAMENTALS MATTER, VALUATIONS DON’T . . .

Real Returns: Stock Market* Versus Investment Fundamentals, Rolling 10-Year Periods, 1881-2016 20% Market Returns Revert to Fundamental Investment Returns -5 -10 -15 1881 1915 1935 1955 1975 1995 2005 2016 *Stock Market Return = Investment Return + Speculative Return WHAT’S AHEAD FOR STOCKS . . .

Looking Ahead 1.

Reasonable Expectations for Stocks— Below Long-Term Norms Sources of Annual Returns on Stocks Historical Prospective 12% 10.8% Returns Active Index 10% Gross Return 11% 4% 4% Costs -2 -2 -0.05 8% 6.3% 4% Net Return 2% 3.95% 9% 6% 4% 5% 3.3% 2% Earnings Growth* 1.2% 2% 0% -2% -3% Dividend Yield -4% Speculative Return* Historical Next 10 Years 1950-2016 *Assumed decline in P/E from 23x to 17x WHAT ABOUT BONDS? . . .

Looking Ahead 2.

Reasonable Expectations for Bond Returns— Below Long-Term Norms Source of Annual Returns on Bonds— Initial Yield on 10-Year Treasury and Bond Portfolio* 7% 6.7% 6% 1.0% 5% 4% 3% 2.6% 5.7% 2% 1.0% 1% 1.6% 0% Historical Next 10 Years 1950-2016 *Assumes accepting moderate additional credit risk and significant interest rate risk vs. the U.S. Treasury 10-year note YET, REAL INTEREST RATES CLOSE TO LONG-TERM NORMS . . .

But “Real” Returns on Bonds Are Not Far Below Norms 10-Year Treasury Note 5.7% 6% 5% Nominal 4% 3.6% Return 3% Inflation 1.6% 2% 1% 2.1% Real 2.0% Return 0% -0.4% -1% Historical Next 10 Years 1950-2016 Note: Projection based on 10-year Treasury Yield September 28, 2016 PUT THEM ALL TOGETHER IN A BALANCED PORTFOLIO . . .

Looking Ahead 3. 52 Balanced Portfolio Returns Below 50-Year Norm of 8.75% Nominal; 5.15% Reasonable Expectations: Gross Returns (50/50 Stock/Bond): 3.3%Nominal; 1.3% Real Don’t Forget These Deductions -1.5% Active Fund Costs* or -0.05% Index Fund Costs * * * Don’t Forget: -2% Excess Taxes and Investor Behavior for Active Funds *Includes transaction costs but not sales loads.

Wrapping Up 53 The Bad News: Lower expected returns than history would suggest.

The Implications: 1.Investors will have to save more.

2.Low costs more important than ever.

3.Domination of index funds continues.

4.DOL Fiduciary Rule favors low-cost and index funds, particularly for retirement accounts. 5.Greater recognition that the past is not prologue. 6.Skepticism about fund managers’ consistency. 7.Reversion to the mean (RTM) becomes part of the dialogue.

CLOSE BY REITERATING TWO QUOTES FROM BH XIV . . .

Tibble v. Edison Unanimous ruling of the U.S. Supreme Court reaffirms fiduciary duty for retirement plans From The New York Times, 2/24/2015: Defense lawyer: it cant be the case that companies have to
constantly look and scour the market for … cheaper investment options, for retirement-plan participants. Justice Kennedy: Well, you certainly do, if thats what a prudent trustee would do. Adam Smith From The Wealth of Nations, 1776 “The interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. … The interest of the consumer must be the ultimate end and object of all industry and commerce.”

Yes, the interests of fund shareholders (consumers) must, finally, triumph over the interests of fund managers (producers).

Thank you for your confidence.

“STAY THE COURSE”