Keynote Speech by John C. Bogle, Founder and Senior
Chairman, The Vanguard Group, Inc.
Before The National Investment Company Service
February 24, 1998
Somehow, someone first invited me to speak before this
organization 20 years ago. I don't really know why. I was a man with a somewhat
checkered record of accomplishment, having been fired as the head of Wellington
Management Company scarcely three years earlier. I had immediately grabbed
at the only straw I could find, determined to use that heart-breaking event
as an opportunity-in-disguise to start a new company. I called it Vanguard,
and when I spoke to you in 1977 we were a tiny mutual organizationthen
as now, owned by the funds we operatewith a charter that limited us
to administration, accounting, and recordkeeping for the six mutual funds
whose management company had just dismissed me. (I was told by the Board to
keep my hands off distribution and investment management. And I did. But only
for a while.)
My First Visit: 1977
I'm confident, however, that your purpose in inviting me
then had nothing to do with the founding of Vanguard, much less with
the fact that in 1975 I had created the first index mutual fund in history
("First Index Investment Trust," as the name we proudly chose at the
outset for the Vanguard® 500 Index Fund). Our index fund had begun with an initial public
offering by a group of brokerage firms. (Vanguard wasn't permitted to "do" distribution.) They had labored and brought forth a mousea
truly microscopic $11 million fund. In those ancient days, the index
fund was something of an industry joke ("Bogle's Folly"), a commercial
failure that would take ten years to become an artistic success.
So, my claim to fame must have been that, only weeks before my speech,
we had at last won the right to run the distribution effort and had cast our
lot with the no-load segment of the mutual fund industryan unprecedented
complete conversion for a firm that had hitherto relied solely on stockbrokers
for distribution. When I spoke to you in 1977, we were still nervously hoping
that the "other shoe (a huge wave of share redemptions) would not drop." The
first shoe had fallen in the market crash of 19731974, slashing by
half our asset base, from $2.6 billion to $1.4 billion. We hadn't bothered
to do any investor surveys or (in the modern mode) take any opinion polls.
It was no more than intuition that told us, as I put it then, that an age
of consumerism and public responsibility lay before this industry, and that
"no-load is the wave of the future."
As I looked over that ancient speech two decades laterin preparation
for these remarksI must confess a bit of pride. I correctly forecast
the coming of asset-based sales charges, the obscuring of the pure dichotomy
between load and no-load funds, the development of sophisticated computerized
systems to offer modern services and more complete information to fund shareholders,*
the rise of index funds of many varieties, and, of course, the ascendance
of the no-load segment, 15% of industry assets as 1977 began. (Vanguard's
entry raised that number to 20%. It has now risen to 32%, the largest market
share of any distribution channel.) Those were considered bold, even reckless,
forecasts two decades ago, but they don't look so darn bad today.
* It's fine that I accurately forecast
these things. But it is you in this room, and your predecessors, who
took the initiative to bring speculation into reality, to do the incredible
hard work involved, with devotion and commitment, to make it all happen.
For this service, the industry owes you a debt of enormous gratitude.
A Second Visit: 1987
Alas, I didn't quit my forecasting while I was winning. And exactly
a decade latertherefore a decade agowhen
I was invited to talk at your meeting once again, I was forced to apologize
for two forecasts that were, to say the least, appallingly wide of the mark.
Then, my keynote speech was entitled "Mutual Funds: A $700 Billion Trust."
(Sort of a swipe at the Investment Company Institute, whose theme at its previous
General Membership Meeting was "Mutual Funds: a $600 Billion Industry.")
By 1987, my two then-misguided forecasts of a decade earlier could hardly
have looked worse. One was that, "in the 1980s mutual funds will have lower
operating expenses." I graded that one an "F" when I talked to you, admitting
that the huge 40% rise in equity fund expense ratios represented a perverse
price-wara war to increase the fees
fund shareholders pay, not to reduce them. Investors should pay, the industry
implicitly argued, "whatever traffic will bear." I disagreed and predicted
that future price wars would drive expense ratios down,
and that relative cost would become a major determinant in success in the
The other was my hapless initial forecast that "institutional markets
will become extremely important to our industry's growth." For in 1987, pension
and endowment plans still accounted for only about one-eighth of industry
assets, unchanged since my first speech a decade earlier. I graded that prediction
with a slightly higher "D," because, I defensively suggested, "the jury is
still out." I assured you that I expected "to see that grade raised in the
years to come," and that "defined contribution pension and 401(k) plans would
open vast new markets for mutual funds."
Well, here we are a decade-plus later. And your program chairmanclearly
a man with a sense of historymust have been reviewing my previous speech
and noting the challenge with which it concluded: "ask me back in 1997 to
review my 1987 predictions and my theme of 'trust.'" Alas, I couldn't be with
you last year, but I've had a change of hearta heart transplant that
has given me a miraculous second chance at lifeand if I am here a year
late, at least I'm here. And I am filled
with energy and enthusiasm as I present this, my third decennial message to
And Now a Third Visit: 1997 (Belatedly)
Today, I'm reaffirming my earlier theme of trust. I have chosen the
title "Honoring Our $4 Trillion Trust: Mutual Funds in the 21st Century."
In 1987, our trust responsibility encompassed $700 billion of assets of the
hard-earned savings of 45 million human beings. We thought that was a lot
of moneywe'd increased 14-fold from $50 billion in 1977but today
we're another six times as large: an awesome $4.2 trillion, representing the
savings of some 75 million human beings. But as I address your 16th Annual
Meeting today (I guess the meeting at which I spoke 21 years ago was not "Annual"),
I'm not at all sure we've adequately honored the standards of trust that I
described in 1987, when I declared:
"We are much more than a mere industry; we must hold ourselves to higher
standards, standards of trust and fiduciary duty. If we fail to do soif
we follow the lead of marketing companies in conventional consumer businesses,
if we create investment expectations we cannot meet, often overlaid with high
risks and laden down with exorbitant coststhe future of mutual funds
is not bright. But if we return to the philosophy of a fully-informed investor
paying a fully-disclosed cost for a sensible investment program, our finest
hours lie yet ahead."
Before I turn to our duty to honor those standards of trust, let me
briefly review my two major forecasts of a decade ago. As it turns out, circumstances
have left me with little doubt about the evaluation that I present today:
one abysmal strikeout (without the bat ever leaving my aging shoulder), and
one Brobdingnagian home run (perhaps an echo of the 1932 World Series, when
Babe Ruth stepped to the plate, pointed to the center field fence, and promptly
delivered the mighty blow).
The ignominious strikeout, of course, was my prediction that mutual
fund shareholders would come to get a fair shake in pricing. But equity fund
median expense ratiosup 40% from 1977 to 1987have risen another
20%, and they continue to rise. Industry-wide expense ratios (including money
market and bond funds) are also upabout 20%. This increase, despite
the quantum rise in fund assets, has carried the costs borne by fund shareholders
from some $1 billion in 1977, to $6 billion in 1987, to $30 billion in 1997.
Wow! And only a small portion of the $30 billionprobably less than
$2 billion, less than 7% of the totalpays for investment research and
portfolio costs. Rather, these revenues generate both truly awesome marketing
expenditures and huge profits for fund managers. For management companies
have arrogated to themselves virtually all of the staggering economies of
scale entailed in fund operations at the expense of fund shareowners whose
very assets created the fee bonanza in the first place. As a result, the investment
capital created for the fund shareholder is but a pale reflection of the staggering
fortune that has been created for the typical fund managerdespite the
fact that the returns earned for fund shareholders by these managers have
trailed far behind the returns of the stock market itself in this unprecedented
The irony that managers earn huge returns on their
capital while fund shareholders earn below-average returns on their capital is worse than paradoxical. I believe that it is incompatible with
our trust responsibilities. So, I press on with my consistentand consistently
wrongprediction that shareholders will ultimately get a fair shake.
Despite 20 years of unfulfilled expectations, I'm confident that the excessive
costs paid by fund investors will at last begin to decline, as the unremitting
evidence sinks in that lagging performance is engendered largely by those
very costs. That lag won't go away, for it is largely the result of the mathematical
tautology that investors as a group inevitably earn the returns of the total
market, reduced by the costs of playing the game.
And that costabout 2% per yearwould reduce a "normal" market
return of 10% to 8%, fully 20% lower. Costs matter.
The Home Run
My second prediction, to say the least, fared considerably better. "The
jury is in." And its verdict has affirmed not only that defined contribution
retirement plans have opened "vast new markets" for funds, but that they have
altered the very fabric of this industry. Fund assets of 401(k) plans, a mere
$15 billion in 1987, total approximately $400 billion todayfully one-eighth
of the assets of all stock and bond mutual funds. Indeed, tax-deferred retirement
plans in the aggregate accounted for 40% of industry cash flow last year.
I see little likelihood that the importance of institutional ownership
of funds will decline in the years ahead. As long as today's financial markets
remain strong, our industry's cash flows will continue unabated, and the institutional
uptrend should persist. And when the stock market faltersas it will
someday (I think!)I would expect institutional flows to level off even
as individual flows drop or even vanish, perhaps to the point where retirement
plans account for all of our net cash flows. (A sustained bear market, however,
would surely shift the preponderance of flows from stock funds to bond funds
and stable-value investment contracts.)
But I continue to believe that, "mutual funds offer extraordinary opportunity
to institutions, from the largest to the smallest, in terms of simplicity,
efficiency, liquidity, and flexibility," just as I did in 1977, when I spoke
those very words to this Association. To be sure, I pointed out then that
to attract institutional clients, funds would have to "offer shares on a no-load
basis and with a low expense ratio" (emphasis in my original remarks). As
we now know, fund shares sold without sales loads account for something very
close to 100% of institutional purchases. They include both "pure no-load"
funds as well as "institutional shares," offered side-by-side with shares
of the same funds sold to the great masses carrying full commissions (an interesting
But even more striking is the anomaly that most funds of both types
typically carry the industry's conventional high operating expense structure.
This "neither fish nor fowl" approachcutting clients a break on sales
commissions but not on expense ratioscannot be sustained in the face
of rational, well-informed corporate intermediaries with a fiduciary duty
for accounts that often run from $10 million to $100 million, and, yes, to
$1 billion and more. I know next to nothing about the science
of marketing. But even 20 years ago it took only common sense to recognize
the obvious about the art of marketing. "An internally consistent pricing policy," as I said to you then, "must be
implemented in such a way that it reinforces the marketing approach." In short,
I believe that my two predictions of a decade agolower costs, where
I was so abjectly wrong, and thriving institutional markets, where I was so
clearly rightmust finally be reconciled. Some firms will maintain prices
and abandon the institutional markets; others will reduce prices sharply for
institutional clients and embrace these markets. These are the alternatives.
No other options exist.
Well, I apologize for my ruminations about the past. I would not do
so if I didn't believe that the lessons of history were so valuable. ("Those
who fail to learn from the past are condemned to repeat it.") Surely the past
can help to guide those willing to learn constructive solutions to profound
issues, and I'm confident we can learn. But, for mutual fund managers and
for mutual fund shareholders alike, both perspective and patience are the
order of the day.
Looking to the 21st Century
Now let me turn to the future. The 21st century lies but three years
away. (Yes, in spite of what you might assume, it doesn't begin until January
1, 2001.) What practices must we change to preserve the trust of investors?
I'll begin with three red flags that I set forth a decade ago as the antithesis
of trust: over-emphasis on marketing, creating excessive expectations on the
part of investors, and offering funds bearing unnecessarily high risks and
excessive costs. Let's look at each warning signal.
First, our emphasis on marketing has become even more extreme. We spend
more time and effortto say nothing of our shareholders' dollarson
marketing than on management, an anomaly that takes my breath away. (For obvious
reasons, I dare not say that it breaks my heart!) Turning a theme of long
ago on its head, "the message has become the medium." Frustrated, I suppose,
by our failure to outpace unmanaged market indexes, we have leaned on massive
advertising to promote sales of our relative handful of funds that have had
outstanding records of past performance, even though we know that few if any
of those records will be repeated.
We promote hoperomantic idylls of gray-haired couples aboard
cruise ships; children cavorting on beaches with their Labradors; college
graduates with their caps and gownswhich is fine for typical marketing
organizations. But we have a higher duty, including the responsibility to
"market" essential information about risk and cost. But we don't do it. And
we create untested "new products" that are apt to be attractive only for a
moment in time. That is not a very creditable strategy for an industry that
must know that sound investing is a lifetime
Let me describe three examples of misguided fund marketing that have
already ridden in the saddle and driven this industry in the past decade:
First, the Government-Plus Fund, "investing in the safety of U.S. Government
Securities and providing a high return." This genre reached its crest in 1987,
when aggregate assets of the dozen funds that had emerged during the previous
two years totaled some $30 billion. One of them advertised a 12% return when
U.S. Treasury bonds were yielding less than 8%. (The extra yieldnet
of 1% expenseswas created by premiums earned on covered call options,
plus short-term gains, annualized for the quarter!) Really, it took no more
than common sense to say, as I did then, that the "yield is untrue," and that
"net asset value must decline as it is converted miraculously into income," and that an income decline would soon follow. And so it did. By 1994, the
initial $15 offering price of that fund had fallen to $8, and its income dividend
had plummeted from $1.20 (counting the capital gain distribution, $1.60) to
$0.52 (no capital gain). The assets of these funds plummeted to $6 billion
and their decent, unknowing, generally older shareholders never recovered
their lost capital. Finally, these funds abandoned their fruitless strategy,
often changing their names. They have not been heard from since.
Next, there was the Short-Term Global Income Fund. This concept popped
up in 1989, a time of 10%-plus yields on short-maturity international bonds,
and provided returns of up to 15% in 1990, largely because of a weak dollar.
Their high yields quickly attracted investor assets, and nearly 40 funds joined
the fray. The concept promptly fell on its face, with these funds providing
average annual returns of but 2% in 19921996, as net asset values tumbled
25%. Total assets of the group, which had reached nearly $25 billion in 1991,
were then truly decimated, falling to $2.5 billion in 1996, at which point Morningstar said "goodbye" and discontinued the category.
Finally, there was the Adjustable Rate Mortgage Fund, the best of this
sorry lot, but a failure nonetheless. Billed as a kind of money market fund,
offering considerable price stability but higher yields, it became, God forbid,
popular. By 1992, it had quickly attracted 37 entrants and $20 billion. Alas,
during the next three years, its annual return averaged but 1.5% (net of a
1% expense ratio, which had consumed fully 40% of the total return!). Assets
had then fallen below $5 billion, many funds had changed their objectives
and their names, and Morningstar also bade
this category goodbye in 1996.
These three examples illustrate that my concern about letting "new products" call the tune was not misplaced. But it was the fund shareholder who paid
the piper in each case. Sure, the industry proved its marketing savvy, but
its management prowess failed to measure up to what reasonable investors had
a right to expect. We watched our shareholders lose their capital in a way
that they should not have, without, as far as I can determine, an apology.
It may have been a great ten years for creative marketing, but it was hardly
great for investment integrity.
Second, we failed to meet reasonable investor expectations of returns.
Of course, I acknowledge that in the wonderful bull market that favored us
during the decade, even our least capable managers provided outstanding returns.
Fully 97% of our equity funds in fact recorded double-digit absolute
annual returns. But with an 18% return for the total stock market, their average
return of 15.5% wasn't very good, failing to meet the expectations of any
investor who assumed, at least implicitly, that professional management worthy
of its hire would outpace the market.
That "mere" 2.5% lag in relative return cost real money. Any investor
who invested $10,000 ten years ago and merely earned the market return would
today have $52,000 of capital. But in the average equity fund, he has an inadequate
(if wonderful) $42,000a $10,000 shortfall from what he might have been
led to expect. And some of the funds in the handful that did succeed in outpacing
the S&P 500® Index during the
decade now stoop to advertise their successful conquest of that Mt. Everest
of the mutual fund industry, the market indexa curious competitor that
happens to employ no research analysts, no economists, no market momentum
technicians, and not even, as such, a portfolio manager. Is that really an
accomplishment worth bragging about in a Super Bowl television commercial?
Third, to complete the litany, we've surely offered funds bearing both
high risks and excessive costs. We've provided the waiting world with some
5,000 equity funds, more than ever before and even more than the number of
stocks listed on the New York Stock Exchange. Only 3,000 of them have been
around more than three years, and 1600 of themmore
than halfcarry more risk (a remarkable 36% more risk on average) than
the stock market itself. (I'm using the Morningstar
risk measure.) That may be all right as
far as it goes, but I don't think it goes very far. Because we pretty much
ignore these specifics. Real numbers showing past risk are conspicuous by
their absence in mutual fund promotional literature, and an investor must
go to Morningstar and the other reputable
publishers of industry performance data to find them.
Turning now to excessive cost, I'm at a loss for words. A huge majority
of funds99% or morenever even discuss the role of costs. We
explicitly present only figures that are legally required, and even those only where they are required. We offer no quantification
of the actual and expected costs of portfolio turnover and taxes, and provide
expense ratios only in prospectuses and in the annual reports, where they
are buried in a dense table right before the ever-exciting "Notes to Financial
We present charts showing imposing long-term market
returns without mentioning this fact of life: When these costs are deducted
from market gross returns, investors as a group receive net returns
that fall materially short. Nor do we show that even two percentage points
of shortfall in annual return can shrink optimal capital value by nearly 40%
over 25 years. Everyone in this business knows that costs matter, and matter a great deal. But apparently we want to keep
our shareowners in the darkignoring unpleasant realities just as did
the legendary monkeys, who would see no evil, hear no evil, and, above all,
speak no evil.
In all, as must be rather obvious by now, I'm disappointed in what appears
to be, not only the lack of progress, but retrogression in the past decade.
So, I'm hoping we will start to get ready now, in 1998, for the new millennium
which begins in 2001. To that end, let me now attempt to define an industry
agenda for the 21st century, focusing on how we can make this a far better
industry, not for those of us who govern it or serve it, but
for those who are served by itby then perhaps 100 million
human beings, shareowners and their families alike. There are four distinct
areas in which we should reconsider our approach to mutual fund investors.
On Investment Strategy
First, investment strategy. Appropriate strategy is the first step that
investors should consider for investors. At the outset, of course, investing
is an act of faith, a willingness to postpone present consumption and save
for the future. We must address the historical returns, and
risks, that have characterized U.S. financial marketsin
stocks, bonds, and cash reservesand not just recent history. And we
must make certain that investors understand the fundamentals that have determined
those returns, as well as the role of speculation in determining returns.
The lessons of history are central to the investment understanding of investors.
In turn, they must understand the important, indeed critical, role of asset
allocation, but also the various factors that influence the risk-reward equation.
Above all, investors must come to recognize the paradox that, more than ever
in this day of complexity, simplicity underlies the best strategies. We must
turn away from today's emphasis on witchcraft and mystery in investing, and
go "back to basics"to the investment principles on which our industry
was founded nearly 75 years ago. Investors must understand these fundamentals,
and it is our duty to impart them to our clients.
On Investment Choices
Second, investors must give much more thought to the investment choices
mutual funds offer. In one of the most interesting of the infinite number
of paradoxes we have created for investors, we have defined investment options
much more explicitly than ever before, relying on a clever but useful system
of defining styles of equity management. It consists of a grid of nine "boxes"
arraying mutual fund styles in terms of their investment orientation toward
value, growth, or a blend of the two, combined with their emphasis on large,
medium, or small stocks. But we have yet to own up to the curiousand
accurateimplication of the fact that the nine-box matrix resembles
the field for a game of tic-tac-toe, the consummate loser's game. And, discouraging
as it may be, that "game" appears to be played, not only for funds as a group,
but for the funds in each of the nine boxes. We have yet to acknowledge that,
if investingclearly a winner's game on an absolute basisis a loser's game on a relative
basis, then the one who decides not to
play the game gains the Olympic gold medalfor relative returns to be
sure, but for absolute returns as well. I hardly need point out that the index
fund simply represents investing without
playing the game. The implications for investors are obvious.
A similar nine-box grid exists for bond fundslong-, intermediate-,
and short-term maturities on one axis, high, medium, and low quality on the
other. But if the news about the stock matrix is sobering, the news about
the bond matrix is devastating. The record shows that even the best fund managers
can add only a small margin of returnbefore
costsin such a highly-efficient market. (A long-term U.S.
Treasury bond fund or a GNMA fund, for example, is essentially a commodity.)
So, when bond funds carry exorbitantly high costsas nearly all dothey
are, plainly put, unsuitable investments. In other words, when costs consume
a large portion of returns in a generic medium, investors are on a treadmill
to oblivion. The bond fund segment of this industryin the early 1990s,
its largest segmentwill be headed for oblivion too, unless we act to
give today's increasingly aware investors a fair shake.
Third, performance. If this industry's implicit promise of superior
returns has been unfulfilled in the greatest bull market in stocks in U.S.
history, what will happen ifas seems all too likelywe experience
a decade of moderating, perhaps even negative, returns. Yes, "it
can happen here." We haven't been up-front with investors that
top fund performance has always been followed by mediocre (truly meaning "average"
or less) performancei.e., that reversion to the mean remains a fact
of life in the world of investing.
We blithely ignore the fact that reversion is normally all the more
promptly (and permanently) manifested when our manager "stars" achieved their
seemingly Herculean feats when their funds had small amounts of assets. Today,
victims of their past success, they find themselves as managers of funds with
tens of billions of assetsto say nothing of being units of fund complexes
with hundreds of billions, a whole second order of magnitude that further
hardens the arteries of the overweight investment body. In the fund world,
"small was beautiful," and "nothing fails like success." We ought to have
the courage to fully disclose to investors this pervasive fact of investment
life, and the still greater courage to stop the marketing merry-go-round and
take meaningful steps to limit funds to
appropriate asset size.
We also need the courage to finally acknowledge that we have virtually
ignored the needs of our taxable investors. The 1997 capital gains realized
and reported in the IRS Form 1099s that have recently annoyed so many of our
shareholdersand the surprisingly large tax bills that they'll be paying
less than two months hencewill take an enormous toll from the investment
returns of our traditional client base. Because we never adequately disclosed
our almost universal policy of managing our funds without regard to tax considerations,
it will come back to haunt us. Yes, we ought to be ashamed, but we also ought
to fix it. Much better disclosure is essential. But equally essential is reshaping
fundsand designing new fundsthat serve the needs of the taxable
investors who have been so ill served by us.
Fourth, funds. We must reexamine the whole nature and philosophy of
today's mutual fund industry. We have moved this industry away from our guiding
principlethat prudent, disciplined management is our core function,
around which all others are satelliteto a principle that aggressive
marketing is the core function, dictating both the way we manage funds and
the kind of funds we offer. To reiterate: The message has indeed become the
medium. Further, the incredible blessing of technology in our operations and
services has also become our bane, facilitating the metamorphosis of mutual
funds away from their role as the providers of sensible long-term investment
programs and toward becoming the proxies for individual common stocksto
be bought when they're hot, sold when they're cold, and traded in mutual fund
marketplaces that too often act as thinly disguised casinos to accommodate
short-term traders in fund shares.
The resolution of these tensions is not clear. To many in this industry,
my ideas simply reflect a Luddite yearning for the more peaceful days of those
of nearly (an appalling) 50 years ago, when I entered this industry. Idealism
and principles may well not serve the needs of the business side of this industry.
But I have absolutely no doubt that they will serve the investment side, and
therefore serve the long-term mutual fund investora human being who,
despite the obstacles we place in front of him, is taking a serious approach
to meeting the serious goal of accumulating and preserving a capital investment
to ensure personal and financial security.
A Radical Idea
To get from here to thereto return this industry to its founding
principlesis conceptually simple. Are you ready for an idea that will
seem radical on first impression? All we need to do is change the structure
of this business. We need a structure in which our mutual fundsorganized
as corporations or trustsare managed like virtually every other corporation
or trust on the face of the earth: in the interests of our shareholders. Fund
directors rarely seem aware that the status quo of having funds managed by an outside organization is the exception, not the
rule, and that the relationship is ridden with potential conflicts of interests.
One daysooner rather than laterthe traditional corporate governance
structure must be brought to this industry.
I can't tell you when or how this new structure will develop. Perhaps
it will come through investor awareness of the burden of high costsan
awareness that a few percentage points of lost return carry a huge penalty
on capital accumulation over an investment lifetime. Perhaps through a brilliant
insight by lagging managers that a significant reduction in a fund's cost
can give them a fighting chance to outpace an unmanaged market index. Perhaps
through an SEC initiative to press the industry not only to reconcile its
high costs with its low relative returns, but to eliminate serious conflicts
of interest. Perhaps even through the Congressat the moment far too
busy with campaign contributions and presidential peccadilloeswhen
and if it turns its gaze to the Investment Company Act of 1940, which, after
all, charges fund directorsindependent and affiliated aliketo
place the interests of fund shareholders ahead of the interests of fund managers.
Perhaps precipitated by a reversal of the unfortunate perception thatafter
a 15-year bull market"if we get high returns, high cost is fine, and
no holds are barred." In a bear market, the perception is all too likely to
be, "if we get poor returns, even low cost is excessive, and we need to set
new investment standards."
Echoing the theme of this conference in a different way, the "Agent
of Change" that will foster a better mutual fund industry is not easy to identify.
Perhaps there will be a confluence of "all of the above." But, as always,
such a great change must await the day that opportunity knocks, and will require
patience. But change is imperative if we are to honor the trust that investors
have placed in mutual funds. However it happens, major change is on the way.
Yesterday, your conference opened with a panel that discussed "Competitive
Intelligence: Winners and Losers 10 Years from Now." I haven't heard what
was said, but I imagine that the winners were identified either as firms providing
a full range of financial services; or firms that have consolidated into giant
"franchises;" or banking conglomerates; or firms that hold distribution and
unlimited investor choice as paramount. Let me present a contrarian view.
I hope and believe that with the onset of the 21st century, the winners will
the shareholders of mutual funds.
They must win in terms of the funds we provide, the principles under which
we manage them, the way we offer them, the services we provide, and the costs
at which we make our funds available. Our owners, to whom we owe the highest
order of duty and responsibility, deserve to be in the winners' circle. They
deserve a fair shake.
The idealistic French author Victor Hugo, he of Les
Miserables fame, espoused, according to a recent article in The New Yorker, "a single insistent doctrine: the
grand old idea that man begins in darkness, and history is grim, yet man,
led by the words of prophets, ever drags himself forward toward freedom and
enlightenment." That comment immediately reminded me of his wonderfully inspiring
epigram: "No army can resist the power of an idea whose time has come." I
cannot tell you how much of the 21st century will elapse before the time will
come for the compelling idea that mutual funds must be structured to serve,
with an interest single, their own shareholdersand manage their portfolios
and their business affairs under that sole standardbut the time will come.
Ever the optimist, I hope it will come by 2008, when I look forward
enthusiastically to joining you once again!
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