Vanguard's John Bogle Says 'Don't Count On It'

Vanguard Group founder John Bogle puts quotation marks around "mutual" in the term mutual fund.

It's not "mutual," he says, because "mutual" means reciprocal respect.

If mutual funds had such respect, they'd stand up to self-dealing managers who all-too-often lay companies and shareholders to ruin.

Giant institutional investors, including mutual funds, "own 65% to 70% of just about every corporation in our nation," Bogle says, "and they are doing nothing."

They take the life savings of working people, give it to corporations, and stand pat as these managers get paid to take outlandish risks. The result has been two major stock market crashes in less than a decade, the near collapse of the U.S. banking system, and the lethargic economy we've suffered ever since.

Bear Stearns, Lehman Brothers and so many others, "ran heedlessly into uncontrollable risks that I doubt they ever understood," Bogle told me in a telephone interview. "That's the kind of thing you do when you're investing other people's money, and not your own. That's one of the failures of capitalism."

Bogle, 81, has just released with his ninth book this month, "Don't Count On It: Reflections on Investment Illusions, Indexing, Capitalism, "Mutual" Funds, Entrepreneurship, Idealism and More."

Bogle has always preached the gospel of indexing -- that indexes, such as the Standard & Poor's 500 -- outperform most money managers over time, so don't bother with Wall Street's fast-talkers and their exorbitant fees.

His latest book is an anthology of observations he's made over his decades in the other-people's-money business, such as:

- "It is far easier to hype the price of a company's stock than it is to build the intrinsic value of the corporation itself.

- "Complexity breeds deception.

- "Society has put its trust in numbers without realizing how...easy it is to manipulate them.

- "We moved from a focus on long-term investment to a focus on short-term speculation.

- "The financial sector actually subtracts value from our society."

He puts it all into one simple equation: Net return = gross return - operating costs.

And the operating costs of our financial system, whether it's a $10 million salary for a narcissistic CEO or a big, fat bonus for yet another bailed-out banker, are out of control for shareholders, and they are running up the national debt, too.

"The immediate solution is to have a federal standard of fiduciary duty," Bogle says, "to makes these money managers trustees. To put the interest of their clients before their own self-interest. And that just is not happening."

Bogle says his definition of fiduciary duty also means that when you give your money to a mutual-fund manager, that manager is closely examining the investments made, standing clear of conflicts of interests such as pay-to-play schemes, and maybe even engaging in proxy issues.

For too long, the ownership of companies has been isolated from the management of companies. The mutual-fund industry is one of the big reasons why. Bogle, perhaps, is among the reasons, too.

Index funds invest in whatever companies are in a given index, regardless of management. That's why the Vanguard 500, for instance, has held such national embarrassments as Enron, American International Group Inc. (NYSE:AIG) and Citigroup Inc. (NYSE:C).

Making matters worse, index funds, like most other mutual funds, have historically sided with management on proxy matters, almost as a default setting. This, of course, is part of the business of running a low-cost fund. Proxy battles, if nothing else, are expensive. But then so is allowing corporate managements to run unchecked.

So now Bogle is calling for more mutual-fund activism in the name of fiduciary duty.

In September, Vanguard helped Barnes & Noble Inc. (NYSE:BKS) win its proxy fight with the billionaire investor Ronald Burkle.

Typically, Vanguard follows recommendations from Institutional Shareholder Services, which had backed the billionaire, citing the booksellers' "deteriorating operating performance, poor shareholder return and less-than-enthusiastic analyst recommendations."

Vanguard, which owns about a million shares of the bookseller, voted its own mind, for better or maybe worse.

Sometimes, it's a tough choice. Do you go with the entrenched management making a corpse of the company, or the vulture devouring what's left?

"It's not going to be easy to get any mutual funds to stand up and be counted in corporate governance matters," Bogle says. "We just need a whole change of heart--and that's said by someone who has had a heart transplant."