Saturday, September 8, 2007

Vanguard Mutual Fund - Strategy and Growth

John C. (”Jack”) Bogle is the founder and retired CEO of The Vanguard Group. He attended Blair Academy on a full scholarship, earned his undergraduate degree from Princeton University in 1951. Upon graduation he went to work for Walter L. Morgan at Wellington Management Company.


After a distinguished career culminating with the position of chairman at Wellington, he founded Vanguard in 1974. Under his leadership, the company grew to be the second largest mutual fund company in the world. Bogle has won a number of awards and distinctions, has served on the boards of various for-profit and non-profit organizations, and continues to be active in The Vanguard Group.


On his popular ABC radio show Moneytalk, Bob Brinker frequently touts Bogle’s philosophies on investing and recommends his books, particularly Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor.
Bogle is also the author of:


Bogle on Mutual Funds: New Perspectives for the Intelligent Investor (McGraw-Hill, 1993), ISBN 1-55623-860-6

Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (John Wiley & Sons, 2000), ISBN 0-471-39228-6

John Bogle on Investing: The First 50 Years (McGraw-Hill, 2000), ISBN 0-07-136438-2

Character Counts: The Creation and Building of The Vanguard Group (McGraw-Hill, 2002) ISBN 0-07-139115-0

The Battle for the Soul of Capitalism (Yale University Press, 2005), ISBN 0-300-10990-3

What did you father do for a living?


“He was a business executive. He was an executive with American Can Company.”

Were you entrepreneurial as a child?


“I was. I did things like lemonade stands. I was always a worker to pay my share and earn my spending money. I was doing this when I was nine or 10. I worked behind the counter at soda fountains and sold newspapers. I always took responsibility and I was always a bit of a loaner.”

Did your parents encourage you?
“They weren’t into that. We were financially struggling. We had social standing and had a lot of money in the 1920s and then it all vanished after the crash. I never felt I was better than anyone else.

“I remember struggling for as long as I can remember. I went to public high school because my father lost his job and then we moved to the shore when he worked for the Cignal Corps and my mother was ambitious for her boys.

“My twin brother and I got scholarships to Blair Academy and that got me into a higher educational level. That increased my interest in studies. I was one of the Top 10 in my class.”

Why did you become an Entrepreneur?


“It was by accident.

Why did you go into money management?


“I didn’t really go into. I was always good with numbers. I like the idea of white collar types of things. I thought I would go into banking and I got a lot of job offers from insurance firms, banks and brokerage firms.

“I had an offer from Wellington Management Company. My career was dictated by my first choice, which was Wellington Management. I was involved in all aspects of the business.

“For better or worse the money management was a profession that had aspects of a business and now it is a business with aspects of a profession and the business has overwhelmed the aspects of stewardship.”

Who were your business role models?
“My mentor Walter Morgan, who founded the Wellington Fund, who was very much an entrepreneur with a well balanced life. He was an outdoor and indoors man.”

What books did you read that inspired you?


“I don’t know that any particular thing did that. I read mostly biographies. I shy away from business biographies. I wouldn’t read any of these business biographies because they are clap trap.

“I like to Widrow Wilson’s biography, Alexander Hamilton, Harry Truman, Teddy Roosevelt and Winston Churchill. I tend to run to the phrase makers. I don’t know if the books influenced my leadership.

“I did read the life of Samuel Johnson and I read it in high school and the line the “force of his mind overcame his every impediment. To read a biography shows you that great adversity can be overcome and there were men of great morale encourage and that bad things happen to even great people.”

Building Vanguard

Did you have a business plan?


“I didn’t write one. Everyone knew what our plan was. I wrote memos to the directors trying to get them to do the current structures. It was an act of self preservation and enlightened public interest.

“I don’t think business plans are worth much. I don’t think of myself as a business man and I am pretty sure I am not a pretty good one. A lot of business is about counting and I rather be someone who runs things on the basis of trust and inspire their commitment.”

Did you take outside money to build Vanguard?


“It didn’t take any capital to start the company. We started it with $50,000. The funds invested in the company. Vanguard is now a $2 billion company. Ninety percent of the cost is people and the rest is space and computer equipment.”

Did you ever envision Vanguard would be a globally respected company?


“My objective spoken to the board was to make it the proudest name in the mutual fund industry. I didn’t think about the global mutual fund business because it was a domestic business and for the most part it still is a domestic business. It’s hard to export mutual funds.”

What kind of people did you look for when you first began to build Vanguard (skill sets, experience, etc.)?


“I wanted people that I liked. People who could bring some sort of commitment to the table. We weren’t hiring money managers in those days. They were all outside. The people had to have character first and then experience, but not to much. Chemistry is considered very flawed, but I consider it very important.”

What was the hardest part of building Vanguard?
“I am not sure there was much that was hard at all. The single hardest job was creating the firm and getting the independent director to see the vision. Then creating the record keeping and then creating the index fund and getting brokers interested in. It was called Bogle’s Folly. Going no-load and no one has done it since. It required courage or stupidity or brazenness.”

What did you enjoy the most about building Vanguard?


“The fact that there was a new challenge every day I came into the office. There was infinite number of things that people working together that started with an idea then going to implementation and then the outcome. I wasn’t big on what came next in terms of the promotional side.

“We had a blunderbuss marketing strategy. Build a better mouse trap and the world would beat a path to our door and then having parties to celebrate each billion that we brought in. I loved getting together with the crew. I like the interaction and letting people know that someone was interested in their best interest.”

What did you like least?


“I didn’t like squabbling and I would not tolerate managers demeaning crew members in any way and speaking down to them.”

What was your biggest surprise?


“I didn’t think the industry would grow so big. It was created by the greatest bull market and everyone pored money into the market. There has been great tax breaks for investors like the IRA.”

Investing


Why index funds?


“The only way you can guarantee you will receive your fair share of the returns the stock market will bestow on us. There maybe better strategies than indexing, but the number of strategies is infinite.”

Why not buy individual stocks?


“It’s a fool’s game and a loser’s game. It’s a game and you don’t want to play games with your retirement money.”

How can the average consumer enhance their chances of picking the best money manager?


“They can’t. On average the average money manager is average. How can it be otherwise because they are competing with each other? It is a zero sum game.”

How has the Internet changed investing?


“For the worse! It’s produced information without knowledge. To the extent it produces knowledge it produces it without wisdom. You can move everything real time and is the antithesis to intelligent investing.”

What investment advice do you have for a busy entrepreneur?


“Figure out what equity ratio they are comfortable with. It depends on the life cycle. Put 100% of your stock investing in a stock index fund and bonds in a bond index fund. Cost is everything.”

Life Advice


How do you know if your spouse can handle the ups and downs of entrepreneurship?


“My spouse could careless. She wished I spent more time with the family. She had confidence I could overcome the challenges. I regret I haven’t been more intense husband, father and grandfather and too many people have done better to make me feel comfortable. If she could handle a husband that had a heart attach at 31 she can handle anything.”

How did you balance business and family life?
“Badly! I worked 60 to 70 hours and still do. Sometimes more, but never less!”

Can you build a successful business working less than 50 hours a week?


“I think you can. It seems these big shots running the large corporations and going in the company plane to golf tournaments. They don’t seem to be working hard. Hard work is a soldier in Iraq, a fireman, a policeman in a bad neighborhood, a bricklayer and trash collector.”

What is the biggest waste of time that a leader often gets trapped in and how do they avoid the trap?


“We live in a society with so much bureaucracy and so much legal detail if you can get out of the morass you are well served. I would be very careful of any generalizations. What is good for entrepreneur A might be bad for entrepreneur B. I think I am an uncommon protype. I did what I wanted and if you aren’t doing what you wanted you aren’t being as effective as you can be.”

Are there any books you would recommend an entrepreneur read?
“I never read a book and got a great piece of advice. I am myself and they are themselves. If you are reading something in a book and say I am going to change the company based on what you read you are in big trouble. Know thy self and know they industry. So no books that I can think of.”

Are entrepreneurs born or can one develop into an entrepreneur?
“I would say develop. Fate made me into an entrepreneur. I was just an executive and I was thrown by chance and self preservation and I love a good fight and a certain type of competition. I don’t like how marketing has taken over from good results.”

Looking back, what advice would you give anyone who wants to build a successful business?


“Don’t look back. Be yourself. People can spot a phony 1,000 yards away. Realize you have to pay the hand you were dealt. How you deal with things depends on your attitude. Try to be honorable. Quoting Churchill “Never give up, never, never, never, never.”



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Vanguard Diehards



Vanguard and Advertising - discussion in 1999

[http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&lastConvSeq=1977]

I thought Vanguard didn't advertise Community Watch
Chapwoman | 06-11-99| 03:40 PM| Total Replies: 16
Lo and behold they are advertising a "Women and Investing" site (at Vanguard.com). What's this? Was I misinformed or do they only advertise on a much smaller scale than other companies? I'm pretty sure I saw an ad in a financial magazine recently also. Someone please set me straight. Cathy



Replies # 1 - # 16 of 16

1. Minuscule but present
scottwil| 06-11-99 | 03:57 PM
Vanguard does a small amount of advertising (much less than other fund families) but it does do some.


2. Vanguard's ads
Real Dima| 06-11-99 | 04:13 PM
They have one of the lowest advertising budget in the industry. You can read about it in Forbes for Feb 9th of this year.

But they do have it.

Real Dima


3. Vanguard's Increased Advertising
gjlynch| 06-11-99 | 04:14 PM
I have noticed that Vanguard's advertising has become more prominent the last five months. It used to be that I occasionally saw a small Vanguard ad in an investing magazine. Now, there are frequent banners on the M* site and I have heard numerous Vanguard radio commercials. I have also noticed that the expense ratio for some of Vanguard's funds have increased by a few basis points, despite them having larger asset bases. Any correlation?

Granted, Vanguard's advertising is better than most in that it focuses on the information and education that Vanguard provides, rather than touting past performance. However, the increased prominence of Vanguard's advertising is not a good sign.

Greg


4. Vanguard advertising
gussie38| 06-11-99 | 04:14 PM
Vanguard does advertise and several financial magazines do carry such adverising every month.

I recently saw an article on this subject but I just don't remember where. It showed Vanguard's budget in relationship to other large fund companies budget and also in relationship to total investments and it quite small.

The ads are usually less than a full page and done in black & white. Nothing fancy.

HH


5. Vanguard advertising
gussie38| 06-11-99 | 04:30 PM
My thanks to Real Dima (reply #2) for clearing my mind. Forbes was where I read about that.

According to Forbes, Vanguard spent $8 million last year on advertising, which, according to Forbes relates as follows.

If you had $10,000 invested with Vanguard they spent 20 cents of your $10,000 on advertising.

HH


6. Higher expense ratios ?
khale| 06-11-99 | 04:54 PM
"I have also noticed that the expense ratio for some of Vanguard's funds have increased by a few basis points, despite them having larger asset bases"

I have not noticed this at all. In fact, I have seen exactly the opposite in that a few index funds have dropped expenses and ratios by a few basis points. The one exception may be for funds that base their expense ration on performance. In that case, the formula would not have changed -- its just better performance that triggers higher expense ratios.

Could you tell us which Vanguard funds have increased expense ratios ?




7. Vanguard doesn't advertise performance
khale| 06-11-99 | 04:55 PM
As I recollect, Vanguard does some advertising, albeit not a lot. But Vanguard does not advertise performance of funds.

Another factoid mentioned by Forbes is that the entire Vanguard group spent as much on advertising as the Kaufmann fund did.






8. Increase in Expense Ratios
gjlynch| 06-11-99 | 05:47 PM
Khale,

Set forth below is a list of Vanguard funds that have increased their expense ratio from the most recently reported period from the prior period. This list is not comprehensive, but I believe it does provide a representative sample. All expense ratios are annualized and expressed in basis points per outstanding assets.


Fund....................Current......Prior

TM Growth & Income........19..........17
TM Cap Apprec.............19..........17
TM Balanced...............19..........17
Capital Opportunity.......94..........49
Aggress Growth............43..........40
High Yield Corp...........29..........28
I.T. Corp.................27..........26
Pacific Index.............40..........35
EM Index..................61..........57
Int'l Growth..............61..........59
Int'l Value...............52..........49
Energy....................41..........38
Gold......................77..........62
REIT Index................26..........24
Windsor II................41..........37
Prime MM..................33..........32
Federal MM................33..........32
Treasury MM...............33..........32
Tax Exempt MM.............20..........18
S.T. Tax Exempt...........20..........18
Ltd. Term Tax Exempt......21..........18
I.T. Tax Exempt...........21..........18
Insured L.T. Tax Exempt...20..........18
L.T. Tax Exempt...........21..........18
High Yield Tax Exempt.....20..........19

Some of the increases are attributable to manager turnover, decreased asset base and performance fees. Further, as you pointed out, Vanguard has decreased expenses on some of its funds; most notably the case cow Index 500 decreased its expenses.

Vanguard has the lowest fees and one of the lowest advertising budgets in the industry. However, I do not like to see Vanguard increase its advertising presence while also increasing expenses on many of its funds.

Greg




9. justification
jeffyscott| 06-11-99 | 08:55 PM
Can anyone provide a valid reason for Vanguard to spend ANY money on advertising. It is owned by its fund shareholders, do they benefit from attracting more assets to the funds? If so, did the benefit to the shareholders exceed the $8 million spent?


10. jeffyscott,
Bylo Selhi| 06-12-99 | 12:24 PM
Bogle argues that increases in fund size lead to economies of scale which _should_ lead to lower fees. He further argues that the rest of the industry has doubly-benefitted from asset growth in that first they raise fees, ostensibly to attract new money, and then fail to pass the resultant economies back to investors.

Index funds (in particular, i.e. as opposed to actively managed funds) suffer few ill effects as they grow in asset size. So theoretically by drawing more new money into their funds Vanguard can gain further economies of scale that they can (and do) pass down to both existing shareholders as well as to new ones.

One would think, given Vanguard's traditional accountability to shareholders, that the aggregate savings that result from fund growth more than offset the aggregate costs of advertising.

That would be an interesting question to pose to Vanguard over at their website. Please share their response with us.

...Bylo


11. A related question to ask Vanguard:
Bylo Selhi| 06-12-99 | 12:29 PM
Do they really think they can derive enough new economies of scale by growing some of their humungeous funds (e.g. VFINX ~$90B) to justify further reductions in its ER?


12. Mutual Fund Advertizing
pollydee| 06-12-99 | 03:19 PM
I concur that too much advertizing can hurt the bottom line. I was unhappy with the performance of my T. R. Price funds and could not figure out why. But then I noticed their ads were appearing on every other page of every financial magazine and newspaper I picked up.

That may have been an irrational reason for bailing out of TRP, but I now feel better about it, and also save some time by not having to read all their ads.

Considering their size, I am happy with Vanguards ad budget compared to other fund families.

Pollydee/Rockville, Maryland


13. Advertising Expenses
PeteElm| 06-14-99 | 12:20 PM
A couple of questions:

It is my understanding that unless a fund has a 12B-1 fee the fund advisor has to pay for advertising, not the fund itself, therefore having no effect on performance.

However, I also understand the Vanguard fund owners own Vanguard thing. So in other words, is Vanguard the only group, that even though it does not have a 12B-1 fee, advertising expenses are still paid by the fund shareholders?

Or wait, Vanguard is a non-profit. But what if they indeed do make a profit. (Income exceeds expenses) Where does this money go? To Vanguard fund shareholders? Thus this would again support the idea that the lower expenses are (advertising, salaries, etc) the better off performance will be because more income goes back to shareholders.

Does anyone understand the above rabble and am I on the right track?


14. Vanguard's Response
limey cajun| 06-16-99 | 02:48 PM
We e-mailed Vanguard and asked them if the $8M advertising figure was accurate and if there was a correlation between that expense and the increase in certain fund fees. We also asked why they felt they needed to advertise at all. Their first reply was very generic and non-specific. We e-mailed again and got the following reply:

Art


Thank you for your e-mail.

The following are responses to your questions:

1. Advertising expenses are included in the expense ratio but do not necessarily have a direct correlation to the increase or decrease of the expense ratios.

2. Vanguard did spend approximately $8 million dollars in advertising last year and the prior year.

3. Vanguard is a no load, low cost provider that operates at cost. We are not a non-profit organization. Although we limit the money we spend on advertising compared to the industry average, to remain competitive, advertising is part of our marketing strategy. Vanguard strongly believes that the best advertising is word of mouth but realizes that other means of advertising is also required to promote our funds and services.

For information about Vanguard's unique corporate structure and our low cost advantage, you may wish to read our Plain Talk brochure entitled "Why Vanguard?" You may read this brochure on-line or order it through the 'Learning Center' link on our homepage.

If you have additional questions, please call our Investor Information Department at 1-800-871-3879. An Associate will assist you.

Maria Koutsoutis
Communication Associate
The Vanguard Group


15. Vanguard's Response
limey cajun| 06-16-99 | 02:49 PM
We e-mailed Vanguard and asked them if the $8M advertising figure was accurate and if there was a correlation between that expense and the increase in certain fund fees. We also asked why they felt they needed to advertise at all. Their first reply was very generic and non-specific. We e-mailed again and got the following reply:

Art


Thank you for your e-mail.

The following are responses to your questions:

1. Advertising expenses are included in the expense ratio but do not necessarily have a direct correlation to the increase or decrease of the expense ratios.

2. Vanguard did spend approximately $8 million dollars in advertising last year and the prior year.

3. Vanguard is a no load, low cost provider that operates at cost. We are not a non-profit organization. Although we limit the money we spend on advertising compared to the industry average, to remain competitive, advertising is part of our marketing strategy. Vanguard strongly believes that the best advertising is word of mouth but realizes that other means of advertising is also required to promote our funds and services.

For information about Vanguard's unique corporate structure and our low cost advantage, you may wish to read our Plain Talk brochure entitled "Why Vanguard?" You may read this brochure on-line or order it through the 'Learning Center' link on our homepage.

If you have additional questions, please call our Investor Information Department at 1-800-871-3879. An Associate will assist you.

Maria Koutsoutis
Communication Associate
The Vanguard Group

Read: http://www.scribd.com/doc/35930/What-is-StrategyPorter

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