The Oracle of Philadelphia

Monday, June 1, 2015

Vanguard Group Founder John Bogle Talks Public Investing at GFOA Annual Conference Keynote Address, Monday, June 1

John C. Bogle, the founder and former CEO of The Vanguard Group, Inc., participated in an interview with Joe Mysak, editor of the daily Bloomberg Brief. Taking questions from the delegates in attendance, Bogle covered a variety of public investing topics.

On municipal bankruptcies. Bogle believes in the strength of the municipal market and thinks that, as a whole, local governments are good investments for bond buyers. Local governments are well managed and have cut costs and become more efficient when times were tight, he noted.

On the outlook for public pension funds.  Bogle feels that the assumed rate of return used by many pension funds – around 7.5% to 8% – is a little too high, and that a percentage point or two less would be more realistic. He emphasized that in pension fund investments, as in mutual funds, past performance is not necessarily an indicator of future performance, and noted that GFOA best practices advise against POBs.

On how to beat an average rate of return in pension investing. A single pension fund might be able to beat what Bogle believes is a realistic rate of return by investing in hedge funds or other higher risk opportunities, but pension funds as a whole cannot beat the market, he said. Bogle applies his mutual fund philosophy again, advising that the best way for pension funds to meet their financial objectives is to keep costs down.

On public pension bonds.  Bogle classifies pension bonds as pure speculation, saying he doesn’t think “hope” is a tenable investment strategy.

On superstar managers and too-good-to-be-true investments.  Chasing the hot fund manager or going in on the latest financial innovation usually turns out better for the consultants and financiers than for the government investors.  Most “innovations” in the financial market are designed to benefit the seller, not the buyer. Bogle’s caution extends to any strategy that involves a great deal of leverage.

On active versus passive investing. Bogle firmly believes that passive investing is the right strategy for public investors as a whole, as anyone familiar with Vanguard’s strategy is aware. Passive investors get the average rate of return from the market without incurring the costs associated with an active investment strategy.  On average, active investors also get the average rate of return from the market, but they incur higher costs to do so, he said.

On the impact of corporate stock buy-backs on retail investors. The record of corporate stock buy-backs is spotty.  Corporations tend to buy their stock back at high points in the stock price, and they often buy stock back to counteract the dissolution of shares that comes from issuing stock options to corporate executives.

On the value of index funds for individual retirement accounts. Index funds are an excellent investment option for individual retirees, but not all funds are created the same. Some funds charge excessive fees or take excessive risks, but few individual investors are sufficiently knowledgeable to make fully informed choices.

On exchange-traded funds (ETFs) versus mutual funds.  ETFs have become the new means of speculation, according to Bogle, who believes that greater activity in the portfolio is usually disadvantageous to the investor – and therefore the ability to trade an ETF is not necessarily an advantage to the investor. But buying and holding ETFs is similar to having mutual fund in their effect on the investor’s portfolio.  All things considered, however, Bogle prefers traditional mutual funds.

On the impact of high-speed trading on the retail investor. The impact on the retail investor should be nothing, because retail investors should not be involved in speculation, Bogle said.