Bogle: Banks Missing the Index-Fund Boat
Winokur, Cheryl, American Banker
Ex-Vanguard Chief Says They'll Never Have Big Role as Fund Managers
VALLEY FORGE, Pa. -- Even after hanging up his hat as senior chairman of Vanguard Group, John C. Bogle is still preaching his indexing message to the fund industry and to banking companies, which he criticizes for their pursuit of an active investing style.
Mr. Bogle said banks generally have failed to participate in indexing, which of course has fueled Vanguard's rise to second place among fund companies in the United States.
Roughly 40% of the assets Vanguard manages are held in index funds, the company said. That is compared with just 4.5% of the $1.09 trillion in fund assets managed by banking companies, according to Nov. 30 data from Lipper Inc., Summit, N.J.
"I think banks by and large are going down the wrong road," Mr. Bogle said in a recent interview. He added that he expects banking companies ultimately will play only a small role in fund management. He refuses to budge in his belief that indexing is the way to go, even though active management outperformed indexing in 1999.
Fund executives at banking companies take exception to Mr. Bogle's criticism and said they will keep trying to give nonbank managers a run for their money.
Mr. Bogle's perception is "about 10 years antiquated," said Robert L. Ash, chief executive of Fleet Investment Management, the mutual fund arm of FleetBoston Financial Corp, which manages some $46 billion of assets in three families.
Banks will continue to gain dominance in the mutual fund world, particularly in the wake of financial services reform, Mr. Ash said.
As for indexing, Mr. Ash said that in the interest of providing choice, a "balanced approach" incorporating both active and passive management is most appropriate. "Active money management does extremely well and is doing significantly well in this market," he said.
Active domestic equity funds beat the Standard & Poor's 500 index last year for the first time since 1993, according to Morningstar Inc. That may become a trend if investor momentum shifts to small-company stocks, said Scott Cooley, an analyst with the Chicago-based fund tracking company.
Lee Chase, vice president of marketing and internal distribution for Wells Fargo & Co.'s proprietary fund family, which has about $60 billion of assets, said that banks are in an ideal position as the balance shifts toward asset managers that have control over sales.
"And banks certainly control distribution," she said.
Nonetheless, Mr. Bogle steadfastly predicts that his message or the simple fact of the success of index investing will get through to the industry as a whole.
A champion of low costs and tax-managed investing, both benefits of indexing, Mr. Bogle predicts a falloff in active management throughout the fund industry. He goes so far as to predict the demise of at least 1,000 actively managed stock funds within 10 years.
In his new role as president of Bogle Financial Markets Research Center -- a position he took up when he stepped down as senior chairman of Vanguard's board of directors on Dec. 31 -- he will certainly get a chance to preach his ideas.
Ensconced at his namesake think tank, Mr. Bogle will research issues affecting the fund industry, give speeches, and write books -- all with the ultimate goal of making sure investors "get a fair shake," he said.
"Everything Jack has ever done, the question has been: 'Is this good for the consumer?'" said Burton G. Malkiel, a professor of economics at Princeton University and the author of "A Random Walk Down Wall Street."
"He's had an enormous amount of influence in making the industry a better deal for the consumer," Mr. …