VALLEY FORGE, Pa. - There's not a shred of doubt in John C. Bogle's mind about where the mutual fund industry is headed.
"In this business, you're going to have to be no-load if you want to survive," asserts the feisty chairman and chief executive of the Vanguard Group of Investment Cos.
Bankers should listen up. Mr. Bogle has built the nation's second- largest mutual fund company on the conviction that people are becoming savvier about investing. They're inclined to take charge of their finances, he believes, and they don't see a need to pay someone else for advice.
Banks, in contrast, have plunged into the mutual fund business on the assumption that consumers want, need, and are willing to pay for help. Most sell mutual funds through brokers who help investors sort through the options - and command sales fees equalling 3% to 6% of the invested assets.
If Mr. Bogle is right, Vanguard is sure to pick off some of the investors who are now learning about mutual funds at banks.
In fact, Vanguard is just one of the extraordinary competitors banks face as they push into the investment business. These rivals are carrying out distinct strategies in mutual funds, financial planning, brokerage, and trust. They share strong convictions that their tightly focused approaches will prove successful in the years ahead.
This series, appearing throughout this week, will spotlight Vanguard and three other "money masters" - American Express Financial Advisors, Edward D. Jones & Co., and Merrill Lynch Trust Cos.
Vanguard's no-load funds are managed at ultra-low cost and sold directly to the public by telephone and mail, without "loads," or sales fees. The strategy, Mr. Bogle says, "is a good bet on a future era of consumerism."
While most mutual fund sales are channeled through brokers, no-load funds are making impressive strides.
No-load funds, which accounted for 36% of all mutual fund sales last year, boosted their market share to nearly 47% in the first four months of 1995, according to the Investment Company Institute, a Washington trade group for the fund industry.
Mr. Bogle - who, at 66, has spent two-thirds of his life in the mutual fund business - says it's easy to see why more investors are going the no- load route.
"Every day, investors' body of knowledge about mutual funds grows, and you can't turn that back," he says, relaxing on a sofa in his roomy, lived- in office. "It's going to grow and grow, making investors more aware of costs, sales charges, and expenses."
Controlling costs is more than a priority at Vanguard - it's a religion. Mr. Bogle himself is a notorious penny-pincher, who is known to brag of his $5 haircuts and cheap lunches.
The company's 88 mutual funds operate at an average expense ratio of 0.30% of net assets - about one-third of the industry average.
Costs are low in part because of the fund management company's structure, unique in the fund industry: Vanguard is owned mutually by fund shareholders, so it operates on a not-for-profit basis. Another factor in holding down costs is that many of Vanguard's funds are managed passively by pegging the investments to indexes such as the Standard & Poor's 500.
"We save our clients about $1 billion a year, compared to what it would cost to run a typical fund company," Mr. Bogle says. What's more, he adds, low costs translate into more business, because "we can deliver any bond fund with a higher yield than the next guy simply because of expenses."
The strategy has clearly worked well for Vanguard, but one analyst has his doubts about whether the company can sustain its edge.
"Vanguard certainly is the prime example of a low-cost delivery mechanism," says A. Michael Lipper, president of Lipper Analytical Services, Summit, N.J. "But low cost always comes at a cost."
While Vanguard's low-cost structure undoubtedly delivers benefits to investors, it may make the company less nimble in responding to change, Mr. Lipper says. For instance, it may become difficult for Vanguard to mobilize the technology to execute trades as swiftly as its competitors can.
"If you study the retail business, there are very few surviving 50-year- old discounters," Mr. Lipper says.
Mr. Bogle, who founded Vanguard in 1974 and plans to step down as chief executive in January, is unfazed.
"I don't like the competition," Mr. Bogle says. "I love the competition. If somebody else can produce better performance at a better price with better service to clients than we can, we deserve to lose."
Many others - including a handful of banks that have opted to market no- load funds - say Vanguard's approach is the wave of the future.
"It's the way the distribution of funds is going," says Lloyd Wennlund, managing director of Chicago-based Northern Trust Corp.'s Northern Funds. He believes other banks will follow suit: "It's going to be a general trend because of pricing and competitive pressures."
Mr. Bogle, for his part, has a few choice words for the banks - 115 at last count, according to Lipper Analytical - that have charged into the business of managing mutual funds.
He reaches into a pile of books and papers on his coffee table. Out from under some thick memos and copies of Great French Paintings and Taxes for Dummies, Mr. Bogle yanks a banking trade group's monthly magazine from December 1993. "Mining Your Share of the Mutual Fund Gold," says the cover, over a photo of a prospector's pan glistening with hunks of the precious metal.
"That's how banks approach mutual funds. I don't like that kind of attitude," Mr. Bogle admonishes. "You know whose pot of gold banks should be looking for? The shareholder's!"
He maintains that most banks are out of step with fund investors. "Banks came in with sales charges, and the business is rolling away from that."
The time is coming, he says, when mutual funds will "substantially supplant banks, even in the savings field." He believes people are coming to see short-term bond funds as the functional equivalent of a two-year certificate of deposit - with a higher rate of return.
Mr. Bogle is equally opinionated when it comes to talk of customers, employees, and products. All three terms have been banned at Vanguard.
"The word 'product' to me is Colgate, Budweiser, or Wonder Bread," Mr. Bogle said. "It's the wrong way to do business."
As for customers, Mr. Bogle much prefers the term "clients." And employees are his "crew" - a reflection of Mr. Bogle's love of the sea and his fascination with naval history.
At Vanguard's six-building campus in the Brandywine Valley 20 miles west of Philadelphia, each building is named after a British warship from the Battle of the Nile, a 1798 engagement that he considers the most complete naval victory of all time.
The British fleet commanded by Admiral Horatio Lord Nelson obliterated the French fleet, isolated Napoleon in Egypt, and secured control of the Mediterranean. And the flagship of Lord Nelson's fleet was H.M.S. Vanguard.
The naval motif extends inside, where "crew" members dine in the "galley," and work out in the "ship shape room."
"I'm the first one to admit it's a little corny," Mr. Bogle says. "I think we've used every nautical metaphor that's possible to use."
But despite the personal stamp the chairman has put on Vanguard, the operation is in for a change in command.
Mr. Bogle, who suffers from a heart ailment, recently announced plans to hand off the chief executive's duties in January 1996 to his protege, Vanguard president John J. Brennan.
Mr. Brennan, who came to Vanguard in 1982 after stints at S.C. Johnson & Son and New York Bank for Savings, is expected to carry on in Mr. Bogle's tradition.
"Jack Brennan is a very bright guy, and he's had two years at one of the better merchandisers," Mr. Lipper said. "He certainly will be up to whatever changes the environment will dictate."
Mr. Bogle, who will stay on as Vanguard's chairman, expects to remain very involved in overseeing investments. "The people who know me know I'll never leave," he said.
