Andrew Hallam
13.03.2020

Are These The Toughest Conversations John Bogle’s Son Has?
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I can imagine John Bogle Jr. on a camping trip. He meets a group of guys fishing off a dock. They talk about the weather and the fish before they introduce themselves.

“What’s your name?” one of the guys asks.

“I’m John Bogle. It’s nice to meet you.”

“Hey, you have the same name as that guy who founded Vanguard.”

“Yeah, that was my dad.”

“That’s amazing. So…what do you do?”

“I run an actively managed mutual fund.”

One of the guys spills beer on his shirt.

“But wait…I read one of your dad’s books. Didn’t he become famous for creating the first low-cost index fund? He says people shouldn’t buy actively managed funds because they cost more than indexes. That’s why they underperform index funds, and they aren’t tax-efficient.”

I haven’t met John Bogle Jr. But I can imagine several conversations that might have gone like this.

“So…” says one of guys on this fictitious camping trip, “You must run one of Vanguard’s actively managed funds. “I once read an article saying they don’t beat Vanguard’s index funds. But they charge as little as 0.17 percent per year, so that’s pretty cool.”

“No, I don’t manage one of Vanguard’s funds. I run the Bogle Small Cap Growth Fund (BOGIX). It costs investors 1.26 percent per year.”

Just then, one of the guys drops a bucket of worms. “Wow! The apple must fall far from your family tree,” he laughs. “How can you charge such high fees?”

“Well, the fund got off to an exceptional start. In 2013, Barrons wrote a story about it, showing how it averaged a compound annual return of 12.4 percent for the first 14 years. That beat its benchmark small-cap index, which averaged 8.6 percent per year.”

“But your dad said actively managed fund that win during one time period almost never keep beating their benchmark indexes. That’s why he says we should only buy low-cost index funds.”

This might have felt like a hook in the younger Bogle’s side. But I can imagine more than one fisherman putting him through the ringer. John Bogle Sr. might have done the same. But the elder Bogle (at least, in public) always supported his son. He even invested in his fund. Plenty of Bogleheads might cry, “But this doesn’t jibe with Vanguard’s low-cost message. And they would be right. In response, John Bogle Sr. told The Wall Street Journal, "We do some things for family reasons. If it's not consistent, well, life isn't always consistent."

Unfortunately, the high cost of Bogle’s Small Cap Growth fund came back to haunt investors. After that celebratory article was published in Barron’s magazine, Vanguard’s Small-Cap Index (NAESX) began to trounce John Bogle Jr.’s fund. Its first 14 years of market-beating performance might have been just luck.

Brad Steiman, of Dimensional Fund Advisors, would probably agree. He ran a series of tests to determine how many years an active manager would have to beat the market before determining whether the success was a result of skill or just luck. He says it takes thirty-six years. “Based on these parameters, by the time you are reasonably confident there is some amount of skill, the manager is likely retired and on her yacht!”

Too often, funds with high-performance histories draw plenty of new investors. Magazines often tout them as a way to beat the market. But once they’re recognised as winners, they often cease to win. It’s much like chasing rainbows in a quest for a golden pot.

According to Morningstar, Vanguard’s Small-Cap Index now has a better 1-year, 3-year, 5-year, 10-year and 15-year track record, when compared to the Bogle Small Cap Growth Fund.

Rainbow followers probably wish they had listened to the older man.

If you want to invest well, it’s best to keep costs low. Ignore past performance. Build a diversified portfolio of low-cost index funds or ETFs. Over time, you’ll beat most professional investors...even if your last name is Bogle.

The Bogle Small Cap Growth Fund Now Falls Behind

Returns To February 19, 2020

 

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

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