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12 September 2017 Financial Analysts Journal Book Review

The Man in the Arena: Vanguard Founder John C. Bogle and His Lifelong Battle to Serve Investors First (a review)

  1. Murad J. Antia, CFA

This compilation of John C. Bogle’s essays on indexing, fiduciary responsibility, and corporate governance, together with transcripts of talks and discussions, is a fitting tribute to the founder of the Vanguard Group, who has consistently advocated putting clients’ interests first and has tirelessly imparted the message that investors would be far wealthier if they invested in low-cost index funds.

Active investment managers wish they lived in Lake Wobegon, 1  a world in which they would all perform above average. Sadly, that world does not exist for their investor clients, whose actively managed funds have earned, on average, below-benchmark returns. John C. Bogle, the founder of the Vanguard Group, has been at the forefront of the revolution that has democratized the investment landscape by first creating a mutual organization, a company owned by its investor clients. He has tirelessly imparted the message that investors would be far wealthier if they invested in low-cost index funds. In a recent article, 2  Bogle observed that relative to actively managed funds, low-cost index funds create additional wealth of 65% for retirees over time. Partly owing to his efforts, investors pulled $460 billion from actively managed funds and invested $560 billion in index funds between 2008 and 2012. By 2013, about 27% of equity mutual fund assets were invested in index funds.

The Man in the Arena: Vanguard Founder John C. Bogle and His Lifelong Battle to Serve Investors First  is largely a tribute to Bogle’s endeavors and accomplishments. Edited by Knut A. Rostad (president and founder of the Institute for the Fiduciary Standard), the book is a compilation of Bogle’s essays on indexing, fiduciary responsibility, and corporate governance, together with transcripts of talks and discussions at the John C. Bogle Legacy Forum. The co-chairs, speakers, and discussants at this event—organized by the Institute for the Fiduciary Standard, CFA Institute, and the Museum of American Finance—included some of the most respected financial minds in the United States. The volume also contains laudatory letters from luminaries and shareholders.

Bogle emerges from the text as a man of high integrity who has put the interests of his clients first. Rather than accumulate a vast fortune, he has chosen to make a difference. He has given generously to a variety of causes, lived a frugal life, and instilled the virtue of thrift in his progeny (though one bucked his father’s opposition to high-cost active management by becoming a hedge fund manager). Bogle has brought informational symmetry to an industry that has traditionally sold high-cost funds on the strength of their historical performance. He objects that historical performance does not correlate with future results and that high fees ravage the returns that investors earn. In his view, investors have been exploited by a high-fixed-cost industry that does not pass on to its investors cost savings achieved through economies of scale.

In the fund business, you do not get what you pay for, according to Bogle—you get what you do not pay for. Morningstar and academic researchers have confirmed that cost is the strongest and most reliable predictor of mutual fund performance. In aggregate, the returns earned by investors must fall short of market returns by the amount of the costs they incur. In addition to investment and administrative expenses, total costs to investors include trading costs and taxes.

Between 1951 and 2012, mutual fund expense ratios increased from 0.62% to 1.15% of assets—but that increase may be partly explained by the emergence of international funds, which tend to have higher expenses. In contrast, the expense ratios for Vanguard funds declined from 0.66% to 0.15% between 1974 and 2013. Quite vexing to Bogle is the discrepancy between the low fees that investment managers charge their institutional clients, such as pension funds, and the significantly higher fees they charge for the mutual funds they manage.

Bogle estimates that speculation, manifested by the preponderance of short-term trading, accounts for 99.2% of trading activity and investment accounts for 0.8%. To discourage excessive trading, he proposes two tiers of capital gains taxes—a lower rate for entrepreneurs because they create value for society and a higher rate for speculators, who, in his view, are gambling in the stock market and subtracting value from society. Bogle recommends a 50% tax on short-term capital gains, which would also apply to tax-exempt accounts. He fails to recognize, however, that such a tax could have unintended consequences. According to the Financial Economists Roundtable, such a tax could simply shift trading to markets and countries where transaction taxes are not imposed. Moreover, convoluted financial structures would be developed to avoid the tax. For instance, a fund could invest in a special purpose entity (SPE) that is domiciled outside the tax jurisdiction, and the SPE could trade securities at will without incurring taxes. 3

The following excerpt from one of Bogle’s essays summarizes his misgivings on corporate governance and compensation:

That final sentence is a particularly strong critique of a segment of the investment services industry, implying that it engages in an unearned wealth transfer, which is a form of rent-seeking activity.

Bogle opposes investing in international markets, suggesting that US investors need invest only in domestic securities. He opines that sufficient international exposure can be gained by investing in US companies because a significant percentage of their profits are earned from their international operations. He cites some of the economic challenges faced by major European economies as reasons to avoid their markets. He is seemingly contradicting his own advice to invest for the long term and not speculate on economic challenges that may well be short term.

The popularity of exchange-traded funds (ETFs) is another bone of contention for Bogle because ETFs create the potential for excessive trading. Bogle estimates a 12-day average holding period for the broadly diversified “Spiders” and “Qubes,” which defeats the buy-and-hold intent of index funds. 4  He confesses that he contributed to the creation of market segment funds, which, as he puts it, are bought to be sold rather than bought to be held. But he neglects to recognize that market segment funds can serve the purpose of filling voids in portfolios. For instance, an investor who inherits a low-cost-basis taxable portfolio that is concentrated in value stocks can achieve broad diversification by adding a growth segment index fund.

The Man in the Arena can get a tad redundant because the same topic or issue is repeated in various essays and panel discussions. And it would have been helpful if the editor had prepared a comprehensive list of references. For example, Rob Arnott’s study on mutual fund performance, mentioned in a panel discussion, is not included in the references cited at the end of the book. These minor quibbles, however, do not seriously detract from a book that is a fitting tribute to one of the most respected leaders of the investment industry. The world would be a better place if more of our business and political leaders emulated John Bogle’s values, ethics, and integrity.


My strong statements regarding the failure of modern-day capitalism are manifested in grossly excessive executive compensation; financial engineering; earnings “guidance,” with massive declines in valuations if it fails to be delivered; enormous casino-like trading among institutional investors; staggering political influence, borne of huge campaign contributions; and in the financial arena, bestowal of wealth to traders and managers that is totally disproportionate to the value they add to investors’ wealth. Indeed, the financial sector actually subtracts wealth from our society.

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