Friday, November 23, 2012

John Bogle: "The Silence of the Funds"

John Bogle had the following to say in this Morningstar interview:

"I am appalled by what has happened in our industry."

Here's why. Bogle says that back when he was doing his Princeton thesis in 1951, the mutual fund industry owned a small percentage of stocks. Now, mutual funds are the biggest owner of stocks. In fact, according to Bogle, large institutional money managers of all kinds now own about 66% of stock.

 "...a big turnaround over the last half century. And they are silent."

 Bogle has a chapter with the title "The Silence of the Funds" in his new book The Clash of the Cultures.

In the interview, he also said this about Benjamin Graham:

" his first book, about a third of that book was dedicated to the role of stockholders and corporate governance, and it's hard to find a word about that in any other book, except, of course, the Bogle books.

But we have a responsibility. We have the rights of corporate ownership; we better exercise the responsibilities of corporate ownership. There is a lot at stake here because the corporations have the same agency problem and those managers want to put their interests before those of their shareholders. I mean this is not black and white, I can see that. But they get too much room to run without any oversight, and you always need oversight. And if the shareholders want the best oversight, the government can only do so much, regulatory bodies can only do so much."

Bogle adds that owners could do much more yet, for a variety of reasons, simply do not. The largest institutions are certainly in the best position to do so considering all the stock that they now own.

In the interview, he talks about some of the reasons why they do not but, to me, a good bit of this comes down to the increasingly short-term focus by participants in the capital markets. Fewer long-term shareholders. More interest in near-term price action. When, in general, a large proportion of participants do not intend to own pieces of a business -- shares of stock -- for very long, it's likely they'll expend far less time and energy carefully thinking about long-term effects and outcomes. Unlikely they'll put much into assuring that responsible governance is in place. Certainly less than a true long-term owner.
(Consider how the average person tends to treat a rental car versus a car they own. Well, maybe too many of our corporations are receiving what's equivalent to the "rental car" treatment.)

In this part of the interview, Bogle points out that the average turnover of a mutual fund portfolio is nearly 100 percent.

"...and that means they hold the average stock for one year. That is unequivocally speculation, and it costs money."*

Those frictional costs are very real. Yet the "silence", as Bogle describes it, by large institutional money managers (those who control roughly 66% of the stock) may actually be far more expensive even if in difficult to measure ways.


* Unlike the expense ratio of a fund, Bogle points out the costs of all that turnover is not disclosed. He estimates these costs at .5% to 1% per year.

Morningstar Bogle Interview on Corporate Governance & Oversight
Morningstar Bogle Interview on Stewardship
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