VALLEY FORGE, Pa. - Even after hanging up his hat as senior chairman of Vanguard Group, John C. Bogle is still preaching his indexing message to the fund industry and to banking companies, which he criticizes for their pursuit of an active investing style.
Mr. Bogle said banks generally have failed to participate in indexing, which of course has fueled Vanguard's rise to second place among fund companies in the United States.
Roughly 40% of the assets Vanguard manages are held in index funds, the company said. That is compared with just 4.5% of the $1.09 trillion in fund assets managed by banking companies, according to Nov. 30 data from Lipper Inc., Summit, N.J.
"I think banks by and large are going down the wrong road," Mr. Bogle said in a recent interview. He added that he expects banking companies ultimately will play only a small role in fund management. He refuses to budge in his belief that indexing is the way to go, even though active management outperformed indexing in 1999.
Fund executives at banking companies take exception to Mr. Bogle's criticism and said they will keep trying to give nonbank managers a run for their money.
Mr. Bogle's perception is "about 10 years antiquated," said Robert L. Ash, chief executive of Fleet Investment Management, the mutual fund arm of FleetBoston Financial Corp, which manages some $46 billion of assets in three families.
Banks will continue to gain dominance in the mutual fund world, particularly in the wake of financial services reform, Mr. Ash said.
As for indexing, Mr. Ash said that in the interest of providing choice, a "balanced approach" incorporating both active and passive management is most appropriate. "Active money management does extremely well and is doing significantly well in this market," he said.
Active domestic equity funds beat the Standard & Poor's 500 index last year for the first time since 1993, according to Morningstar Inc. That may become a trend if investor momentum shifts to small-company stocks, said Scott Cooley, an analyst with the Chicago-based fund tracking company.
Lee Chase, vice president of marketing and internal distribution for Wells Fargo & Co.'s proprietary fund family, which has about $60 billion of assets, said that banks are in an ideal position as the balance shifts toward asset managers that have control over sales.
"And banks certainly control distribution," she said.
Nonetheless, Mr. Bogle steadfastly predicts that his message or the simple fact of the success of index investing will get through to the industry as a whole.
A champion of low costs and tax-managed investing, both benefits of indexing, Mr. Bogle predicts a falloff in active management throughout the fund industry. He goes so far as to predict the demise of at least 1,000 actively managed stock funds within 10 years.
In his new role as president of Bogle Financial Markets Research Center - a position he took up when he stepped down as senior chairman of Vanguard's board of directors on Dec. 31 - he will certainly get a chance to preach his ideas.
Ensconced at his namesake think tank, Mr. Bogle will research issues affecting the fund industry, give speeches, and write books - all with the ultimate goal of making sure investors "get a fair shake," he said.
"Everything Jack has ever done, the question has been: 'Is this good for the consumer?'" said Burton G. Malkiel, a professor of economics at Princeton University and the author of "A Random Walk Down Wall Street."
"He's had an enormous amount of influence in making the industry a better deal for the consumer," Mr. Malkiel said.
Of course, not everyone agrees with Mr. Bogle. As Lipper chairman A. Michael Lipper puts it: "Clearly he's a prophet, and prophets often do not get a lot of followers."
Vanguard was ridiculed by competitors for its first index fund in 1976; more than once it was called "Bogle's folly." Today, Vanguard's 500 Index Fund is equipped to oust Fidelity Investments' Magellan as the world's biggest mutual fund. On Dec. 31, the Vanguard Fund's $104.7 billion was just a nose behind Magellan, with $105.9 billion, according to data from both companies. (In total assets under management, Vanguard's $534 billion trails Fidelity Investments of Boston, with about $750 billion, according to Financial Research Corp., Boston.)
Mr. Bogle said he expects Vanguard will face competition from several shrewd peers. He cites the likes of TIAA-CREF, the teachers' pension and annuity company, which makes six mutual funds available to the public; Nicholas Group of Milwaukee, which offers six mutual funds and a number of separately managed accounts; and Dodge & Cox, a San Francisco-based manager of three no-load funds.
All three have strong management, a long-term focus, relatively low costs, centrist investment objectives, and low turnover of their holdings, Mr. Bogle said.
He politely scoffs at the notion of Vanguard's joining forces with other fund companies.
Though he shows satisfaction in Vanguard's blockbuster growth rate, he also downplays the competition with Fidelity for No. 1. "Being bigger than someone else doesn't matter," he said. "I'd sure like to be the best."
In two decades with Vanguard, "what I've done more than anything else, I think - and others should be the judge of that - is that I've taken the witchcraft out of investing," Mr. Bogle said. "I've taken the mystery out of investing and stripped it down to its essentials."
Though he expressed disappointment with Vanguard's original decision to enforce its mandatory retirement age, he does not dwell on it. Ultimately the company's board of directors reversed itself, but at age 70, Mr. Bogle said he decided to the "gentlemanly thing" and step down.
Mr. Bogle is keeping his office on Vanguard's campus, where a life-size statue of him was erected by the fund company's board of directors after his heart transplant a few years ago. Originally he said he did not want the statue, because he associated the concept with dead people. However, Mr. Bogle said he changed his mind when one of golfer Arnold Palmer was erected in Georgia.
Mr. Bogle said he plans to cut back a little on his 65-hour work week and "maybe even take a day off once in a while." He tries to find time for a weekly game of squash and takes frequent walks with his wife and their dogs. "I've got the energy of a 29-year-old," he said.
Meanwhile, Mr. Bogle's missionary zeal, which earned him the nickname "St. Jack" is likely to continue, observers said, albeit with less of a bully pulpit. (The nickname emerged about 15 years ago after he was given a clerical collar at an annual staff assistants' dinner.)
"He loves to be involved, and it's just hard for him to not be," said John Neff, who managed Vanguard's Windsor Fund for about 30 years. Mr. Bogle will continue to "take shots at some of the industry practices that seem out of order," Mr. Neff said.
Jonathan Zeschin, managing partner of JZ Partners, a Denver-based fund consulting firm, said: "I don't think he's going to fade into the woodwork. That's just not his style."