How Vanguard Hires Its Managers

How can you tell whether a fund is being mismanaged or is just going through the inevitable ups and downs.

Mar 14, 2014 at 9:06AM

John C. Bogle is the founder and retired CEO of The Vanguard Group, the largest mutual fund organization in the world, comprising more than 160 mutual funds with current assets totaling more than $1.4 trillion. Since his retirement from Vanguard in 1996, Bogle has spent his time studying, writing, and speaking on the financial markets and mutual funds. He is president of the Bogle Financial Markets Research Center, created in 2000 to support his ongoing work on behalf of investors.

Even successful funds underperform some of the time; how can you tell whether a fund is poorly managed, or just going through a rough spot? In this video segment Bogle explains Vanguard's approach to assembling management teams for its funds.

We hope you enjoyed this exclusive interview with Jack Bogle, the father of index funds himself.

If you did, it may surprise you to learn that over the past two years, Motley Fool co-founder and CEO Tom Gardner has sat down with dozens of the world's brightest investors and business minds on behalf of his Motley Fool ONE members — we're talking true American legends like Whole Foods co-CEO John Mackey, Costco founder Jim Sinegal, and Chipotle co-CEO Monty Moran.

On March 20th, this "crown jewel" service will reopen to new members for only the third time ever. And to celebrate, Tom would like to offer you a front-row seat to watch these visionaries share the keen insights and unparalleled business acumen that got them to where they are in life.

Even if you aren't an investor, the business lessons you'll take from these conversations are priceless. So please click here to access our Motley Fool ONE member lobby and our entire collection of these interviews absolutely FREE of charge!

Tom Gardner: Even the most successful, actively traded funds at Vanguard have a period of three years -- sometimes even five years -- where they underperform, but net-net they've outperformed.

In the case of outperforming actively managed funds, let's just say they have a few qualities that we probably both love: very low turnover, tenured leadership, a very fundamental business-analytical approach.

But even in those cases where the fund is very well run -- even Warren Buffett and Charlie Munger -- are going to have a year or a period of a couple of years, potentially, where they lose to the market. What's the appropriate amount of time to hold something before saying, "This team doesn't really know what they're doing?"

Jack Bogle: Well, let me start off by explaining Vanguard's philosophy as I implemented it -- not as they necessarily do today.

That is very early after we closed Windsor Fund back in 1985 --- it was getting too big -- and we started Windsor II. Everybody said it would never do nearly as well as Windsor, and of course it's done better, a little. They track each other very closely, so I don't want to make an issue about that.

Then we had U.S. Growth, and that was run by Wellington. We decided we needed a new manager, and I wasn't so sure about them, so I did what set the standard for everything I did since then, and that is bring in another manager, and then another manager, and then another.

We have a lot of equity funds that have five managers. It's not that it's easy to pick five managers, but if you're comparing yourself with the universe of -- let me say -- large-cap value funds, and there are 50 funds in that universe, five is going to have the same return. It's a law of large numbers thing.

Most of our equity funds have five to seven managers, so there's not much premium on manager selection. You hope they will do well. We happen to be having a good year this year, but we'll have a bad one because that's the nature of the business.

What you don't want is something that departs so far from the market -- particularly on the upside -- I mean, you don't like it on the downside, but on the upside it draws money in. It brings in these investors who are looking for the next big thing, the next hot thing.

We win by about a point and a half a year, on average, not because we pick better managers, but because we have very low operating costs; our expense ratio. We negotiate the fees way down with the advisors -- the fee rates -- because the advisors are not starving to death in terms of the dollar fees.

Then we've looked, as you said, for long-term managers with lower turnover, and then we have no loads. If you look at all those numbers if we're good enough to be average -- or lucky enough to be average -- we win by about a point and a half a year, which is 20% over 10 years, and I always thought that was quite good enough.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers