We all love John Bogle for his brutally honest takes, and Business Insider got a doozy recently. Inquiring about (what else?) the prospects for active management, they asked the legendary Vanguard founder and industry elder statesman if mutual funds, and actively managed mutual funds in particular, are doomed.
The answer was classic Jack.
“The active managers have a philosophy they can win,” Bogle said. “They come into the office every day and say, ‘Boy, Mark, I’m going to beat the heck out of you today,’ and they don’t. When they have a bad year, they say it’s that year; I’ll do it next year. It’s a hard business and it’s not the expense ratios that have to be cut, but also the trading. The transaction costs are very high–they’re hidden; they’re not going to tell you what they are—they are there and they are large.”
Because he’s brutally honest but also the nicest man you could possibly meet, Bogle pulled his active management punches somewhat, before resuming the body blows.
“If you’re very talented and keep winning, you’ll do just fine,” he said. “It may take a while. But the talent is hard to identify and talent is hard to tell from luck. There’s an awful lot of luck in this business.”
In what is sure to hurt the active argument, Bogle’s comments come as Harvard Management Company, responsible for the university’s endowment that just a few years ago hit a gazillion bazillion dollars, announced in was letting go of half of its portfolio managers for poor performance.
“Harvard’s fall from investing grace has been both rapid and sobering. In the past five fiscal years it earned just 5.9 percent a year on its $35.7 billion endowment and managed to lose money in 2016, The Wall Street Journal reported Wednesday.
To put that in perspective, a portfolio passively invested in a traditional 60/40 allocation over the same five years would have earned 8.9 percent annually. The management company’s top six executives earned nearly $45 million, despite this under-performance.