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A Legend Still Pines for the Good Fight

Vanguard’s John Bogle never pulls his punches when it comes to assessing the industry he has helped shape for more than 50 years.

Don Phillips, 08/28/2013

This article originally appeared in the August/September 2013 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.

Recent gains in the stock market may be allowing investors to erase some of their memories of huge losses in 2008, but they still face serious problems on the road to retirement. At the 2013 Morningstar Investment Conference, Don Phillips, head of global research with Morningstar, sat down with Vanguard founder John Bogle to discuss the issues that investors and the fund industry must confront in the years to come. In his usual blunt fashion, Bogle didn’t mince his words, tackling money market reform, Social Security, retirement plans, and the legacy of Eliot Spitzer, a decade after the market-timing scandals sent shock waves through the mutual fund industry. Not surprisingly, even the firm Bogle founded doesn’t agree with everything he says these days. But that didn’t stop him from speaking his mind. The conversation, which took place June 13, has been edited for clarity and length.

Don Phillips: Let’s begin with a couple of hot topics in the industry. Money market reforms have been on a lot of people’s minds. What do you think of the solutions that have been suggested and are they the ones that you would advocate?

Jack Bogle: It’s really interesting when we talk about probabilities and risks because the probability of something bad happening in the money market business is tiny. But the consequences when things do go wrong can be fatal.

Congress has decided that no more taxpayer money should bail out the money market fund industry. That seems like a reasonable position to take. Taxpayers are bailing out everything else, but we might as well draw the line for a profit-making business. So the consequences are dire, but the probabilities are tiny. I think we still must act.

What bothers me, and this bothers me a lot, about the industry in which I find myself— it doesn’t seem to like to get right down to the truth. What’s the fact? The fact is that money market funds’ net asset values fluctuate. What’s the industry’s problem? They don’t want to let the world know that money market fund asset values fluctuate. So, I think they’re leaning on kind of a weak reed. Of course, this industry, which is in the technological vanguard of just about everything, apparently can’t deal with a single class of funds that has a floating net asset value. That seems a little crazy to me.

I think the industry has got to stop defending its own financial interests and start thinking about the interests of shareholders and letting them know actually how money market funds work. I don’t like the reserve solutions that have been proposed, having the funds hold a reserve. I wouldn’t even know how to do it from an accounting standpoint. My solution is to have a floating net asset value, say $10. You can hold up to $10 if you really want to be conservative. That’s up to the money market manager. But have that [floating NAV] be the solution.

Now, what the government has decided to do, or the SEC is recommending—it’s not done yet—is to have asset values float for institutional funds, where the largest problem is. That seems to me like a King Solomon-type decision. Cut the baby in half. I don’t think we should compromise. We should be upfront and do the thing that we know is true.

Don Phillips is a managing director of Morningstar, Inc.

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