The Vanguard Group
Vanguard Group Founder's Mutual Fund Message Finds Life amid Industry Woes

By Paul Adams
13 December 2003
The Baltimore Sun

For more than 50 years, mutual fund executives have tried to ignore John C. Bogle, founder of the innovative Vanguard Group of mutual funds.

Bogle earned the scorn of competitors for saying the industry is tarnished by high fees, incestuous corporate governance and lack of accountability to shareholders.

Now, everyone is listening.

Mutual fund managers have been struggling to contain a scandal sparked in September, when New York Attorney General Eliot Spitzer began a series of revelations of widespread market timing, late trading and other abuses that have cost everyday investors billions of dollars.

Suddenly, Bogle, a 74-year-old heart-transplant survivor and squash enthusiast, who preached low costs with missionary zeal as he built Vanguard into the second-largest mutual fund company in the nation, can no longer be dismissed as an iconoclast with a "holier than thou" message.

Long before Spitzer, say admirers, there was Bogle.

"Jack Bogle built a multi-hundred billion dollar fund company, so he's an insider saying there's something wrong in mutual fund land, and he can't be dismissed," said Gary Gensler, former co-head of finance at Goldman Sachs, a treasury undersecretary in the Clinton administration and co-author of The Great Mutual Fund Trap.

"There are people in the mutual fund world that were hoping Bogle would take retirement seriously but he's been given a new platform with the Eliot Spitzer investigation."

After an internal power struggle, Bogle was forced to step down as Vanguard's chairman when he hit the mandatory retirement age of 70 in 1999. Rather than hit the links, Bogle launched a new career as a full-time industry critic.

Surprisingly athletic for a man with a secondhand heart, he manages his crusade out of a ground-floor office in the corner of Vanguard's legal department, which is part of a sprawling corporate campus located outside of Philadelphia. Decorated with antiques and stacked with books and papers, the space has an ambiance that feels more academic than corporate.

Employees still greet him reverentially as he strolls the halls, but he is no longer welcome in the executive offices upstairs. The unpleasant circumstances of Bogle's departure from the board have driven a wedge between him and his handpicked successor, John J. Brennan. As they passed each other on the stairway one recent Friday, Bogle greeted his former protégé. Brennan, who was walking with a Vanguard attorney, never looked up.

"I gave them their jobs," said Bogle, who was dressed comfortably in a green sweater and khaki pants. "I just don't understand."

Beyond Vanguard's walls, Bogle still draws crowds to his frequent speaking engagements. The pinky finger on his writing hand is disfigured by a bulbous callous, built up from years of writing speeches in longhand on legal notepads. The final drafts are typed up by an assistant who helps run the Bogle Financial Markets Research Center, which is funded with a stipend from Vanguard.

With the industry in turmoil, Bogle has used his bully pulpit more vigorously than ever, calling on lawmakers and regulators to implement reforms that would make the industry's fees more transparent and require directors to be independent.

Many are concepts he has been talking about in speeches and op/ed pieces dating back to 1949, when Bogle began writing his senior economics thesis on the mutual fund industry while a student at Princeton University.

"Nobody is speaking from my particular pulpit," he said. "I would easily argue that all I'm doing is being something I never expected to be, and that is a good businessman. Candor is a great marketing strategy."

His frankness has inspired legions of die-hard "Bogleheads," who meet in an Internet chat room to talk about his latest musings on investing and mutual funds. When the "Die-hards," as they call themselves, held a gathering in Miami in 2000, Bogle surprised them by agreeing to come. He was going to be in town that weekend for a conference.

"He was so unassuming that it was difficult to realize he was the founder of one of the largest financial companies in the world," said Taylor Larimore, co-founder of the Die-hards.

Bogle had dinner and stayed with the group for several hours. He has since attended two other Die-hard gatherings.

"With Jack, I think what you see is what you get," said Burton Malkiel, a Princeton economist who has been on Vanguard's board since 1977. "He is a man who says just exactly what he means. He doesn't pull punches; doesn't put a political spin on anything."

Not everybody agrees with his analyses.

The Investment Company Institute, an industry trade group, says Bogle's frequent complaints about management fees, high portfolio turnover and shareholder turnover are based on faulty math. For example, the institute says its studies show total expenses for mutual funds have declined over the years -- a claim that flies in the face of Bogle's criticisms.

"Some things I think he's right about and some things I think he's wrong about," said Matthew P. Fink, the institute's president. "The media always questions us because we're speaking for the industry, but I would be equally skeptical of the critics."

Still, a growing number of people -- including federal regulators -- are listening to the man some have derisively nicknamed "Saint Jack" because of his persistent scolding of the industry he helped revolutionize.

In the midst of a blizzard of television, newspaper and magazine interviews in recent weeks, he spoke to students and faculty at three prestigious private universities, wrote an op/ed piece for the Wall Street Journal, attended a convention of business journalists and testified before a Senate committee investigating the mutual fund industry.

In his off hours, he twice found time to play squash -- something he resumed doing after receiving a new heart from a 26-year-old donor in 1996.

"I know a whole lot of people who spent their entire life waiting for their retirement," Bogle said while being driven through Washington's rush-hour traffic on his way to a taping with CNBC. "I say this partially tongue in cheek, but I have a funny feeling that if I stopped, I'd die."

With a rapid-fire baritone voice suitable for radio, Bogle peppers his speeches with quotes from literature and delivers them with ministerial passion. James S. Riepe, a former protégé who is now vice chairman of Baltimore-based T. Rowe Price, once presented him with a clerical collar as a joke.

Though he gives dozens of speeches a year, Bogle can quote from them verbatim, often recalling the year and date each was delivered without consulting his notes.

"I have observed Bogle at industry conferences and I've always been struck by his forthright nature, and what I think makes him such a compelling figure is his willingness to bite the hand that feeds him, so to speak," said Larry Moscow, executive producer of Wall Street Week With Fortune and a former CNBC news director. "He's consistent and I think he's intellectually honest, and TV producers always like people who are forthright."

Family and former colleagues say Bogle is savoring the higher profile he has gained since Spitzer's investigation became nightly news. Spitzer paid homage to the retired Vanguard executive during his testimony to the Senate Governmental Affairs Committee on Nov. 3rd, calling him "a voice in the wilderness."

"He was preaching about mutual fund board independence and a lot of these governance issues before it was fashionable to do so, and now it's become fashionable in spades," said Bogle's son, John Bogle Jr., who followed his father into the business.

"He certainly likes being right, but he particularly likes being right when it's contrarian or controversial," he said.

The Montclair, N.J., native was born into an affluent family, the son of a World War I aviator and the grandson of William Yates Bogle Sr., who co-founded the American Can Co.

Much of his father's fortune was lost in the stock market crash of 1929, forcing Bogle to go to work at a young age to help put himself through school. He went on to graduate cum laude from Blair Academy, a private boarding school in Blairstown, N.J. His grades were good enough to land him a full scholarship to Princeton, where he studied economics and continued to work 30 to 35 hours per week waiting tables and manning the university's athletic ticket office.

Barely a year out of his teens, Bogle came upon a Fortune magazine article about the mutual fund industry that would shape his future. The subject inspired his 123-page senior thesis, which would become the blueprint for his campaign to change the fund industry.

Based on that work, Walter L. Morgan invited Bogle to join the Wellington Fund in 1951, then one of the largest mutual fund companies in the country and a paragon of conservative investing. Bogle recalls Morgan sending out a memo to associates, saying that his new hire "knows more about the fund business that we do."

It wasn't long before Bogle's love of numbers -- dating back to his days as treasurer of his Boy Scout troop -- became an asset to the firm. He could often solve complex equations with a slide rule in less time than it took others to complete the calculations using clunky, desktop calculators. By the late 1950s, it was clear Bogle would one day lead the firm.

But just as his career was beginning to take off, Bogle suffered his first heart attack while playing tennis with his brother-in-law in 1960. It would be years before doctors would correctly diagnose his rare heart arrhythmia, which results in a rapid heart beat that might lead to unconsciousness or death.

At age 31, Bogle was told he likely wouldn't live to see 40. Seven years later, doctors told him to stop working. Over the decades, he would suffer a half dozen more serious heart incidents, including several that would require doctors or bystanders to use CPR to get his heart beating normally again. A squash partner once had to beat on his chest to revive him after an attack during a match. Through it all, Bogle kept working and, for much of that time, playing squash.

"I didn't think they knew what they were talking about and my first rule in life is get out of bed in the morning," he said. "If you don't do that, absolutely nothing else is going to happen all day."

At Wellington, Bogle introduced new funds and hired key managers, such as John Neff, who would gain fame for his high-performing Windsor Fund. Others followed, but soon Wellington's conservative approach began to lag the high-flying funds that swept the industry in the late 1960s. Under pressure to boost the firm's performance, Bogle engineered a merger with a Boston investing firm that was making headlines with its red-hot Ivest Fund.

Reflecting back on the decision, Bogle blames himself for not foreseeing the problems that would follow.

"I believed they were good managers," Bogle recalled. "It was a whole succession of intellectual arrogance, egotism and self confidence unwarranted by knowledge or understanding. It was a bunch of classic mistakes for a kid that was too young to run a company."

Bogle, who was used to getting his way, clashed with the four partners from Boston, who didn't share his conservative views on investing and considered him too stubborn and arrogant. In the wake of the market slump of the early 1970s, the Bostonians used their superior voting power to oust Bogle as chief executive of Wellington Management, the entity that managed the company's funds.

But Bogle remained chairman of the funds Wellington managed, giving him a platform on which to launch his comeback. In the days and weeks after his firing, he convinced the fund directors to place him in charge of the funds' back-office operations, while Wellington Management retained management and distribution responsibilities.

With just a few dozen employees, Bogle named his new organization Vanguard, after Admiral Nelson's flagship in the Battle of the Nile. Though his role was severely diminished, he soon began looking for ways to snatch power away from Wellington Management. First, he took over distribution by convincing the board to make the funds no-load, thus bypassing the brokers used by Wellington.

Then, in 1976, he slashed the need for management by introducing the Vanguard Index Trust. Because the fund simply mirrored the S&P 500 index, there was no need for expensive managers to oversee investing. And with the lowest costs in the industry, Vanguard's index fund quickly became one of the largest in the business.

"It's all gross return minus cost equals net return," Bogle said, repeating one of his favorite investing concepts. "The mathematics don't fail."

It was clear early on that Bogle wasn't going to be a typical fund executive. In an industry where executives keep an uncommonly low profile, Bogle preferred the spotlight. He gave frequent interviews to media and spoke with candor in the company's annual reports and shareholder meetings. Not everything he said was well received by his counterparts in the fund industry.

"They've all got massive egos and I think the real reason Bogle bugs them is not his attitude, but that he's got a very demanding message," said Russ Kinnel, director of fund analysis at fund tracker Morningstar Inc. "There are a lot of things he thinks are inappropriate that the rest of the industry has been saying is acceptable."

Bogle's laser-like focus on keeping costs low became legend as Vanguard's reputation grew. On company trips, he always flew coach and took the subway, rather than a cab. On one outing in 1984, he argued with a clerk at New York City's Plaza Hotel until he agreed to knock more than $100 off the price of Bogle's room.

That frugality extended into the home, where Bogle and his wife, Eve, raised six children in a four-bedroom house outside Philadelphia. John Bogle Jr. recalls being able to see his breath on cold winter mornings.

"My mom wanted to save the environment and my dad wanted to save a nickel, and so I remember being constantly cold in the wintertime," he said.

Despite their wealth, the family never had a cleaning staff or nannies to help care for the children. Bogle drove the same Accura Legend for more than 10 years, John Jr. said. Eve Bogle preferred to buy Volvos, which she would drive into the ground before buying another.

The senior Bogle said his one extravagance is his off-the-rack Brooks Brothers suits.

"I just don't get much joy out of spending money," he said. "It's hard for me to do. I don't know, it probably goes back to my youth and waste-not/want-not."

By the mid-1990s, Bogle's enlarged heart was failing. Walking across the room became a struggle, as did running a billion dollar mutual fund company. After being hospitalized and put on the waiting list for a new heart, Bogle named Brennan to replace him as chief executive. After 128 days of waiting, he got his new heart.

"It turned out it suited me perfectly," Bogle said of his new heart. "I think it is probably fair to say there has never been a more successful heart transplant."

Doctors were amazed by his speedy return to work and the squash court.

"For a guy with all the heart problems he's had, he sure plays a mean game of squash," said Mercer E. Bullard, a former Securities and Exchange Commission attorney and founder of Fund Democracy, a shareholder advocacy group in Oxford, Miss. Bullard has been an occasional squash partner for Bogle. "If the ball's within reach, he'll put it away on you, so the trick is to make him run for it."

Bogle remained senior chairman at Vanguard until his ouster in 1999. Malkiel, the longtime Vanguard director, said having Bogle looking over Brennan's shoulder created pressure on the board to enforce the mandatory retirement age.

"It was just such an unusual circumstance," he said. " Certainly, many governance experts say you cannot have two CEOs and it's not a good idea to have the old CEO looking over the new CEO."

With his heart still strong, Bogle says he plans to continue his crusade to reform the industry for as long as he has the energy. On Nov. 21, he joined Eliot Spitzer as a keynote speaker at a conference on corporate governance hosted by the New York Society of Securities Analysts at the Harvard Club on 44th Street. His 16-page speech focused on shareholder rights and called for new corporate governance structures that will safeguard the interests of investors.

"I like using the energy I've got," he said in an interview before the event. " So when you've got it, flaunt it, as Mae West or somebody once said. One of my family mottos is 'press on regardless.'"


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