The Fix Is In?

This is a partial transcript from Your World with Neil Cavuto, November 5, 2003, that was edited for clarity.

Watch Your World w/Cavuto weekdays at 4 p.m. and 1 a.m. ET.

NEIL CAVUTO, HOST: With the onslaught of attacks on mutual funds mounting and investors pulling their money out of questionable funds, is there a solution out there to fix the mess.

Let’s ask the legend John Bogle. He’s the founder of The Vanguard Group and one of the most honorable men in this business.

John, good to have you.

JOHN BOGLE, THE VANGUARD GROUP: Thank you for that, Neil, very much.

CAVUTO: Personal question for you, John. I mean you built this industry really. Are you embarrassed by what’s been happening?

BOGLE: Well, hey, I didn’t build the industry, but I built a company that is pretty much exempt from all the kinds of things that are going on out there.

And I’ve also been talking about building a better industry, since I wrote my senior thesis at Princeton a half century ago. And you know what I said in that thesis? Mutual funds should be managed in the most honest, efficient, and economical way possible.

That was the formula, and we went a long way away from that.

CAVUTO: John, what would you do differently right now?

BOGLE: Me as a mutual fund manager or me as an investor?

CAVUTO: Let’s say as a manager, advice for your colleagues.

BOGLE: OK. Well, I think we’ve got to start putting the shareholder in the driver’s seat, and that’s going to be a hard thing for managers to do because, as I heard just a little while ago, just like money is the mother’s milk of politics, well, so is money the mother’s milk of mutual fund management, and the problem with mutual fund management is, as you know, Neil, is that the more money the manager gets, the less in the fund the investor gets. I mean this is not a complicated financial situation.

CAVUTO: So what do you do? You cut down their fees.

BOGLE: We have to cut down management fees, yes. The fund directors are going to have to get on board in all this. We have to cut down turnover costs, which means cutting down turnover, and turnover is so grossly excessive.

You know, we’re not stockholders. We’re not stockowners anymore. We’re stock traders. We exist in a rent-a-stock industry. That’s not the right way to invest. Those will be two very helpful things.

We also ought to spend a lot less on marketing.

CAVUTO: Yes. What about the fund manager themselves? I mean there was a day when, you know, they were paid a good buck, but now they’re paid an outrageous buck, you know, multimillion-dollar contracts. Do they deserve that?

BOGLE: No. Uncategorically, no. Look, I read that the president of one of the Boston firms that’s involved in this scandal made, I think, $150 million in the last five years. It’s a living, but a living for funds that have lost investors billions and billions of dollars.

And the head of the Denver firm -- those fellows are centi-millionaires, many of them, probably a billionaire out there or two. How have their funds done? They’ve done terribly.

CAVUTO: Would you call for then, let’s say, average salaries of what, or would you even recommend that?

BOGLE: No, I don’t want to get into calling for average salaries because some people are above average and some people are below. I’d call it the way it comes out.

What we need here is the fund-independent directors to take on the power and responsibility to negotiate with the managers for the best fees for the shareholders they’re honor bound to represent, and, if they do that, I don’t care how much the managers pay their CEOs. But it’s not going to be anything like $30 million a year.

CAVUTO: Yes, but, John, I talk to a lot of mutual fund investors who say, you know, Neil, the hell with it. I’m getting so reamed here, I might try these strange rated funds that trade like stocks, as you know. I might go that route, or I might trade individual stocks themselves on my own. What do you tell them?

BOGLE: No, don’t trade individual stocks on your own, I’d say, and don’t trade ETFs on your own.

CAVUTO: Why?

BOGLE: You know, ETF is just an index fund. Buy an index fund and hold it forever, you know. Don’t trade. Don’t pay the commissions you have to pay to buy the ETF. You can buy the exact same fund in a mutual fund form and get essentially the same exact kind of investment program at what may be a lower price when you take the...

CAVUTO: Yes, but, John, people might say that, look, John’s an honorable guy, but he’s doing something that would drive people to Vanguard, and this is his selfish interest here.

BOGLE: Well, let them say what they wish to say. You know, we know cost is important, and I tried recognize that at Vanguard. We know low turnover is important. I tried to recognize that at Vanguard.

We know this is not a secret. Every Nobel Laureate in economics will tell you to go to index funds, and, if they can buy a lower cost index fund than ours, buy it, don’t buy ours.

CAVUTO: All right. Just let us know where you stand, John. We can’t tell.

Thank you very much.

BOGLE: I’m trying to pull my punches today, Neil.

CAVUTO: John Bogle, the legend behind Vanguard.

Thank you, sir.

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