Christine Benz: I'd like to talk about indexing and how things have evolved in the index world. One thing we've seen in terms of investor choices recently is that investors have been using index funds for their U.S. equity exposure but generally preferring actively managed funds for fixed income as well as international. And I would like to get your sense of whether you think investors are making good choices there?
Jack Bogle: I have not looked at that data with the care with which I should before I answer that question, but let me give you a couple of thoughts.
On international, there's a lot going on in the ETF area, which is trading in international, and particularly in the emerging-markets portion of international, and that is an indexing business. And my recollection is that is getting stronger--that is to say, indexing in international is getting stronger--but it's a long way from the U.S. proportion, which is almost 100% or more with money going out of actively managed funds and into index funds. So, I think it will come around to that.
There's a little, I don't know if I want to call it an old maid's tale or something like that, about the fact that only in large-cap efficient markets does indexing payoff. That of course is demonstrably false. Indexing always pays off, no matter what kind of markets, because all the investors in that market segment, let's call them emerging markets, share the discrete return or return of the discrete securities that are in that group. And the index does the exact same thing, and charges less, so it wins. So indexing is going to continue to be strong.
In the bond area, I have two reflections. One, there's this great hero out there. He was on television last night, Bill Gross. And he is, by the way. He's had a remarkable record. I'd say, never quite willing to give too much, that if you can do all that at a couple of trillion dollars, it's pretty amazing. But we'll see. So let's call it the Bill Gross or the PIMCO effect, for a lot of the active management is out there.
And in the bond area, you never get what I would call active management. The spread between the actively managed bond fund that's successful and the index fund could be a couple of percentage points a year. It's not like in the equity area, where it could be 15 percentage points in a given year, or 20. So it's the Bill Gross effect.
And then also, I suspect, and again without looking at the data, that an awful lot of bond fund business comes out of Wall Street--Morgan Stanley, Merrill Lynch, and so on. Those bond funds are sold, and they are going to sell actively managed bond funds for, dare I say, the obvious reason--the salesman makes more money selling them than he does if the client buys a no-load fund. So it's a combination of those things that reflect on that.
Peter Fisher, who is at BlackRock, a very brilliant guy, used to be part of the U.S. Treasury Department, says the bond index fund is the wave of the future. That's a paraphrase. But it's hard for me to believe that he's not right. And our bond business is vibrant, and it's all indexing. So, I think it's just a matter of patience.