Christine Benz: Abigail Johnson from Fidelity had an interesting piece within the past week about performance fees, whether active managers should be paid more when they outperform and be paid potentially less when they underperform. What do you think of performance fees? I know Vanguard has had performance fees on some of its subadvised funds for years.
Jack Bogle: We've really basically been doing that since the beginning of Vanguard and even earlier. I'd say, charitably, there is absolutely no evidence that it works. Do funds with performance fees up and down do better than those without? There's no evidence of that. There's a lot of evidence that funds with performance fees, let me say a performance fee with 1%, another quarter of a percent, if you beat the index by a couple of percentage points a year, down a quarter if you don't, and the manager says, "Why have we never beat the index? So, we don't we just change the fee to 1%?" And they did and they do.
Listen to your intuition a minute. How is that gonna happen? When you look at the numbers for the performance fees, they're based on the funds' total assets, OK? The portfolio manager, let me say in an ideal case, gets maybe 10% of that, particularly in the larger funds, or 20% or 5%. So, the other 95 is going to the manager, his boss if you will, and I just don't see any evidence that they in fact work.
I like the idea. Investors find it very palatable and even charming, but sooner or later if it doesn't work, it's not going to do anything to revolutionize this industry. Then generalize, all managers have incentive fees. Do all managers all of a sudden outperform the index? Wait, a minute. It's one extra cost if they do win. There's nothing in substance, bad about performance fees, but I'm saying that I have never observed anything good about them.