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The Less Understood Sides of Jack Bogle

Russel Kinnel
Christine Benz

Christine Benz: Hi, I'm Christine Benz for John C. Bogle passed away on Jan. 16 at the age of 89. Joining me today is Russ Kinnel, Morningstar's director of manager research. He is going to discuss some of the less discussed or even misunderstood aspects of Bogle's legacy.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let's start by talking about indexing. So many people believe that Bogle was a proponent of indexing because he was a believer in the Efficient Markets Hypothesis. Not the case, right?

Kinnel: That's right. He was very much a believer in indexing, but he put out that CMH mattered more than EMH--CMH being the Cost Matters Hypothesis. Essentially his point is that in the aggregate mutual funds are more or less the market and therefore, your returns are going to be the market's returns minus costs. So, even if the market is not that efficient, index funds are going to come out ahead because they have such a huge cost advantage. He also was a believer in low-cost active. If you look at many of Vanguard's big funds when Bogle was there, they are charging just slightly above what index funds are charging, so very low-cost management. Hhe really strongly believed in low-cost active as well. So, for him, it was costs first, passive second.

Benz: We'd often hear him say you get what you don't pay for.

Kinnel: Exactly.

Benz: Another perhaps less understood aspect of Bogle's legacy is that he was single-mindedly devoted to index funds, that there weren't other aspects of the asset management industry that he thought could be better. Let's talk about that. What were some of his other passionate pursuits within the asset management industry?

Kinnel: Well, another aspect of Vanguard, of course, was that it was mutually owned by fund holders, and as he said, that meant they served one master. He viewed other fund companies as serving two; they may be publicly traded and therefore, served their shareholders but also fundholders and of course, that means you have to make compromises along the way. So, Bogle very strongly believed in people being fiduciaries every step of the way and really focusing on clients. And of course, that also meant he believed that intermediaries, advisors, and planners should be solely serving investors' best interest, not merely being sales people who kind of looked out for investors but also looked out for their own profits.

Benz: And he certainly was a vocal part of the debate about a fiduciary standard for financial advisors.

Kinnel: Very much.

Benz: Another thing that you said is maybe a little bit less understood is the fact that Vanguard wasn't always the giant that we know it to be today. Now we know it to be one of the very largest asset managers but didn't necessarily obviously start that way and even wasn't that way in the '90s.

Kinnel: That's right. In the '90s it was--most of the time in the 90s--it was the second or third largest fund company. I think it really was a big difference not just in terms of their size but also in terms of the debate out there that before ETFs really became popular, Vanguard, and to a degree DFA I guess, were out there talking about passive investing. But everyone else had a job of selling against it. There weren't really a lot of other places to go for passive investments. And so, the dominant voice out there was for active. When ETFs became big all of a sudden, there were a lot of people out there who could make money selling ETFs, and the debate changed and you had a lot more vocal advocates of passive investing. But it was a long time from Vanguard's founding in the '70s to becoming the dominant player in the 2000s. It really took Bogle's perseverance to get it there.

Benz: Another aspect of Bogle's legacy that perhaps hasn't been so discussed, as we've talked so much about his impact on the industry, has been his impact on individual investors, people like us. Let's talk about that.

Kinnel: You really saw it on Twitter, other social media when Bogle passed away, so many people talked about their experience meeting with him and how it was a highlight of their career. We had that experience, too. He would come visit our office, tell us how important Morningstar is. He would really get us motivated, get analysts here motivated because he was really an evangelist. So many of the people we talk to in the financial industry, even if they are smart and care about investors, they are also selling something. Bogle wasn't really selling something so much as he was selling the idea of supporting investors, doing everything for investors, doing the right thing even when no one is looking. I think it really is a tremendous motivator. I think that's part of why Vanguard's culture became so strong was that Bogle wasn't just someone promoting indexing. He was someone who really believed in doing the right thing for investors across the board.

Benz: Such important points, Russ. He was a giant. Thank you so much for being here to share your perspective.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for