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Bogle: Vanguard's Size a Worry

Diminishing economies of scale and potential regulatory concerns limits how much bigger Vanguard should become, says founder Jack Bogle.

Christine Benz: We've talked about Vanguard being a big beneficiary of investors recognizing the importance of keeping their costs down. What would be too large for Vanguard, if anything?

Jack Bogle: I'm tempted to say 4.7 trillion. I worry about it. I guess anybody that wrote a book called Enough would worry about it. The economies of scale just can't keep going on much longer. We've only got 12 basis points to go, and let me say it: There's an irreducible minimum, no matter how big you are, just for the fun of it, 8 basis points, cost a lot of money to run this business. We're now talking about a 4  basis point improvement in cost. I just don't think it's worthwhile, hyping and trying to bring in more and more money.

I said, and I don't advise the management, but I--and that's just as well, that's the way it is, I don't decide anything, I don't have to take the consequences--but I do think that when you get down to these kinds of issues, one of the things I would say was, let's take the foot off the accelerator and ease it gently over to the brake. That's a hard thing to do. We all know it's going to have to be done sometime. I mean, maybe 25 years from now.

That brings up an interesting regulatory issue, and that is the Investment Company Act of 1940 says, in essence, that no mutual fund can own more than 10% of the voting shares of any security. That limitation happens to apply to only 75% of the funds' assets, but that's an indifferent limit. So, 10%. If you had an index fund that owned 10% of the company, they'd have to stop buying it. They couldn't own any more. The manager creates another index fund. Totally legal right now, but eventually some limit like that 10% limit, it could be a little larger, I doubt it will, but it's possible. It could be anything will apply to all the holdings of a given management company or fund sponsor. That will be a limiting factor.

This will of course take congressional action, which, we know where the ICI will come out on that. They'll finally be defending index funds. That's kind of exciting to think. There's that limitation, punitive limitation. There's the reality that the index business is an oligopoly of Vanguard first, BlackRock second, and State Street a weak third in terms of assets. Oligopolies are not attractive to U.S. governments or world governments. I mean, this phenomenon for exchange-traded funds, and index funds generally, is all over the world. At it's strongest, I'm quite confident, here in the U.S., but it exists almost everywhere, and I don't see how it's going to back down.

We really have a revolution, the index revolution, and it's everywhere and it's common sense, and it's math and it's the only way that I know of that you can predict relative to the market exactly what your return will be in the next 10 years. You will get the market return less 5 basis points. If a manager guaranteed that to you over the next 10 years, he would probably take in billions or trillions. And we substantively guarantee that. I feel a little bit like some combination of--well, let's see who it would be--like the emperor's clothes guy, with kids pointing at the mutual fund industry and saying, "You don't have any clothes." They don't like that. And then I also feel like maybe the guy who's going to call wolf and people are just going to say, "No, it's not a problem." I think you have to be in this business, which is now, basically it's a vested public interest in this industry, which owns 35% of all the stocks in America. That's not going to go away.

The overall industry will probably be more and more indexed, almost certainly, but it will be under the microscope. We have had, we at Vanguard, have had the white hat in this industry. I don't think there's any question about that, and so we ought to be abundantly careful and I think we will be.