One of the many great things about my gig as the lead analyst for the Fool's Champion Funds service is that I get to talk regularly with the fund industry's very best and brightest for each issue of the newsletter's All-Star Q&A segment.
In the past, for example, I've talked with value investing luminary Bill Nygren, co-manager of Oakmark I
An interview with Vanguard's indexing guru, Gus Sauter, recently appeared in our pages, too, and the issue of Champion Funds that will hit the streets this Thursday includes excerpts from my recent conversation with another Vanguard standout -- a gentleman by the name of Jack Bogle. Perhaps you've heard of him?
Turn the page
Vanguard founder Bogle has written a new book -- The Battle for the Soul of Capitalism -- and for folks who care about the integrity of our financial markets and institutions, it is a page-turner indeed.
Bogle has long been a passionate critic of the money management business and an equally passionate advocate for individual investors. In our conversation, Bogle called the fund industry's market-timing and late-trading scandals "a moral and financial outrage," and yet he also regards those same scandals as "a beautiful revelation."
After all, they expose the fund industry's (pardon the pun) fundamental conflict of interest. As Bogle puts it, "The manager likes to manage the largest possible amount of money and an intelligent investor doesn't want to go with a fund that manages so much money that it can no longer succeed in reaching its objectives."
To which savvy fund investors everywhere can only say, "Hear, hear!"
Exceptions to the rule
Still -- and as Bogle allows in our interview -- there are exceptions to the rule.
Not coincidentally, it's precisely those exceptions that our newsletter service is dedicated to uncovering. Consider, for example, the dreaded topic of "asset bloat" -- i.e., when a fund rakes in so much moola that its ability to navigate the market's terrain resembles one of those lumbering, helium-inflated balloons that grace each year's Thanksgiving Day parade. With that in mind, while doing my homework for Champion Funds, I strongly favor shops that are willing to close off the inflow spigot (and the fees those inflows would provide) in order to do right by their current shareholders.
Moreover, like Bogle, I'm aghast at how much some fund companies get away with charging investors for their services. In his book, Bogle tracks an unfortunate shift from what he calls "owners' capitalism" to "managers' capitalism," a system that predominantly enriches the folks who steward (if you're lucky) your investment as opposed to those who actually put up the capital and take on the investment risk -- i.e., you.
Again, on that front, I couldn't agree more with the man many regard as the father of index investing. All too many funds are run with the money management company's corporate interests in mind, as opposed to those of its individual shareholders.
A better way
I am not, however, an advocate of index-only investing. Don't get me wrong: I'm a big fan of market trackers such as Vanguard Total Stock Market
Still, investing only in index funds means always having to say you're sorry. The most you can realistically expect is to lag the market by about the amount of your funds' expenses. With that in mind, I think there's a better way, one that recognizes that during certain periods of the market's history, indexing as an investment strategy has fared best while during others (the last five years, say) active management has, on average, been the way to go.
Why guess whose turn it is to outperform if you don't have to? It's easy enough to own both flavors of funds.
The hit list
The question, of course, is how to choose the best actively managed funds when so many of them fail to keep pace with their benchmarks or are managed, as Bogle suggests, with the interests of their managers -- and not their shareholders -- foremost in mind.
Champion Funds exists to answer that question on a monthly basis. In the newsletter, I favor funds whose managers "eat their own cooking" by investing their own assets alongside those of their shareholders. I also look for those with reasonable price tags -- the typical Champ runs with an expense ratio of less than 1% -- and whose managers have long-haul track records of beating the market.
In our chat, even Bogle -- Mr. Index Investing himself -- acknowledged a few active shops that he admires, characterizing the folks who run them as "investors, not marketers." If you'd like to see Bogle's list -- along with all the recommendations I've made since Champion Funds opened for business in March 2004 -- click here for an absolutely risk-free trial.
The new issue comes out this Thursday at 4 p.m. EST, so you won't have to wait long for all the fund news and views -- including those of Jack Bogle -- you can use. After perusing it, I'd love to know what you think. And for just that purpose, our members-only discussion boards -- which come gratis with your free trial -- provide an excellent forum.
See you there!
Shannon Zimmerman is the lead analyst for the Fool's Champion Funds newsletter service. He owns shares of Oakmark Select and Vanguard Total Stock Market. Shannon abides by the Fool's strict disclosure policy.