By Simon London
August 5, 2000
The following article originally appeared in the Financial Times.
In 1974, a young executive by the name of Jack Bogle was fired by Wellington Management, at that time one of the largest mutual fund companies in the US. The problem was that Wellington did not like Bogle's unconventional views regarding the investment industry. He felt that management companies held too much power and that investors in mutual funds (the US equivalent of unit trusts) were often taken for a ride.
The dispute would have stopped there if Bogle had been content quietly to look for another job. But he was not. Instead, he convinced the independent directors of funds managed by Wellington to change fundamentally the nature of their relationship with the management company. Instead of paying a fat fee every year to Wellington for administration and accounting, the funds started providing these services for themselves. In return, the annual fee paid to Wellington was reduced, lowering the annual cost to investors.
Before long, the funds were also looking after their own fund management and sales and marketing, all through a non-profit company christened Vanguard. Mutual funds had become true mutuals. Today, Vanguard vies with Fidelity as the world's largest fund company. The company provides services to investors on an "at cost" basis - with the result that Vanguard funds have the lowest expense ratios in the industry.
I don't want this column to be an advertorial for Vanguard. But the success of the model pioneered by Jack Bogle is worth noting at a time when mutuality is under attack from all sides. In the UK, there is now a reluctant consensus that mutuals have no future. Building societies are a dwindling breed; Nationwide, the only remaining society of national significance, finds itself under siege again from carpetbaggers. Mutual life assurers are dropping like flies - EquitableLife, Scottish Widows, Friends Provident...
So what makes the Vanguard model successful when other mutual financial companies are falling by the wayside? Importantly, the appetite of a fund manager for capital is small compared with a building society, which makes loans against which provisions are required, or a life assurer. Thus Vanguard has been able to grow without infusions of capital from outside shareholders. The company also makes an obvious virtue of its mutuality and low costs, something which UK mutuals are only now learning to do. Investors flock to its funds precisely because of this. To demutualise Vanguard would be to destroy it.
The further question is this: why has no-one copied the Vanguard model in this country ? It seems to me self-evident - as it was self-evident to Bogle 30 years ago- that the British unit trust industry is run primarily for the benefit of fund management companies rather than for investors. Initial charges (up to Pounds 60 per Pounds 1,000 invested) are too high; annual management charges (another Pounds 15 every year, on average) show no sign of coming down; accountability to investors for poor performance is virtually non-existent; standards of disclosure (on both costs and relative performance) are farshort of acceptable. I feel sure that there would be a market for simple, low-cost unit trusts managed by a mutual manager.
The hurdles, it seems to me, are threefold. First, unlike US mutual funds, unit trusts do not have independent boards to represent the interest of investors. There is no-one to argue in favour of mutuality. The balance of power is tilted even more in favour of the management companies. Second, starting a mutual fund manager requires an initial capital investment. Yet it seems unlikely that the shareholders of fund companies such as Jupiter or Perpetual will vote to mutualise. Bogle's solution was to take over the management of a number of existing funds. No such opportunity is likely to arise in this country.
Third, it takes a visionary and a firebrand to find a way round these problems and to take on the combined might of the fund management establishment. Britain has not produced a home-grown Jack Bogle.
Note: The opinions expressed in this article do not necessarily represent the views of Vanguard's present management.
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