John C. Bogle- Journal of Portfolio Management, Vol 34, No.2 "John Bogle, founder of Vanguard group, highlights security industry trens during the past 60 years and suggests it is time to demand chage… What has changed over 60 years? -Equity funds now hold 30% of all US stocks, up from 1% -Only 11% of equity funds focus on large-cap investment grade stocks, down from 80% -Holding periods for fund investors and for managers have declined by as much as 75% -More than 1/3rd of equity funds are managed by a single individual, whereas management by investment committee was formerly the rule. -Average expense ratios have increased by at least 50% -Sadly, the mission of the mutual fund business has changed from managing investments to marketing for assets. The question in Bogle’s mind is whether the benefits provided by the financial system outweight the costs of obtaining them. Investors are likely to face several years of lower dividend yields, lower earnings growth, and a reduction in p/e ratios compared with the past 100 years. If net equity returns tumble to an estimated 2.2% ( 7% less 2.5% fund costs, less 2.3% inflation), will invesotrs be capable of accumulating the wealth necessary to fund their aspirations?
“Sadly, the mission of the mutual fund business has changed from managing investments to marketing for assets” Someone in ER once told me that some PM’s are lazy when it comes to research. They attempt to perform near the index and spend most of their time marketing for AUM.
ditchdigger2CFA Wrote: ------------------------------------------------------- > Someone in ER once told me that some PM’s are lazy > when it comes to research. They attempt to > perform near the index and spend most of their > time marketing for AUM. If you think the market is efficient, this is the way to go. You can better max. your revenue (fees) by increasing your AUM since you can’t consistently produce much, if any, alpha. The business is higly scalable, so most of the increased fees will go straight to the bottom line.
More importantly, what’s in store for the next 60 years? For example, we’re seeing a migration from commission based brokers to fee based advisors. What’s next? Flat retainer fees? Thought? It’s a bit shocking that expense ratios are actually up.
It is a bit of a paradox with the expense ratios. When a manager is good you would think that they could drop their expense ratio because of all the assets they capture…but when you are good you capture the rents so you can actually justify increasing your fees. If you do this means that you have a much lower probability of beating the market going forward as your hurdle is getting higher. So I guess everybody is walking the line. Of course massive marketing campaings don’t hurt either.
Is this Bogle’s article from JPM earlier this year/late last year. If so, I read it a little while ago and it was definitely some refreshing realism.
bchadwick Wrote: ------------------------------------------------------- > Is this Bogle’s article from JPM earlier this > year/late last year. If so, I read it a little > while ago and it was definitely some refreshing > realism. It might be, But I picked it up from CFA Digest- August Edition
Coming from a guy who has a direct interest in selling low fee ETFs(ie, make money only through volume instead of skill)? I’d take it with a huge grain of salt…