* (c) 2004 John C. Bogle, President of the Bogle Financial Markets Research Center; Founder and former Chairman, The Vanguard Group, Inc. This Essay is based on a lecture the author delivered at Boston College Law School on January 21, 2004. The opinions expressed herein do not necessarily represent the views of Vanguard’s present management. The Boston College Law Review has relied on the Bogle Financial Markets Research Center to compile the financial data presented in this Essay using the identified sources.
1 Big Money in Boston, Fortune, Dec. 1949, at 116, 118–19 (quote appears in caption to picture entitled “Boston Trustee, 1950 Model”).
2 SEC, Investment Trusts and Investment Companies (pt. 1) 102 (1939) (internal quotation omitted).
3 Investment Company Act of 1940 � 1(b), 15 U.S.C. � 80a-1(b) (2000).
4 Investment Company Act of 1940 (codified as amended at 15 U.S.C. � 80a).
5 Id. � 1(b)(2), 15 U.S.C. � 80a-1(b)(2).
6 Id.
7 Sources: Wiesenberger (1943–1992) and Lipper’s LANA database (“Lipper”) (1993–2003). From 1993 on, reported expense ratios represent the asset-weighted average of all MIT share classes.
8 Sources: Wiesenberger (1969–1989) and Lipper (1999, 2003).
9 Assets slumped to $6.5 billion in 2003, with fees totaling nearly $80 million.
10 This was a ninety-stock index until 1957.
11 Sources: Wiesenberger (MIT return from 1926–1992), Lipper (MIT return from 1993–2003), Standard & Poor’s (S&P 500 return). From 1993 on, reported MIT return represents the asset-weighted average of all MIT share classes.
12 Because the Index return ignores the real world costs of investing, of course, that shortfall may not be surprising.
13 The ratio had risen to an estimated 1.2% in 2003, suggesting a much wider lag in the years ahead.
14 Sources: see supra note 11.
15 It was I who served in these positions, but I feel more comfortable using the third person format. This combination of seemingly conflicting roles was then, and remains now, the industry norm.
16 John C. Bogle, John Bogle on Investing 256 (2001) (quoting Harlan F. Stone, The Public Influence of the Bar, 48 Harv. L. Rev. 1, 8–9 (1934)). The speech, entitled Deliverance, was given to the Wellington Management Company Partners in Boston, Massachusetts on September 9, 1971.
17 Id. (emphasis added).
18 Id. at 257–58.
19 Source: Wiesenberger.
20 Under the proposal, the Wellington Group would acquire only Wellington Management’s mutual fund business. Its counseling business would have been returned to the pre-merger partners.
21 John C. Bogle, Mutualizing Wellington Management Company 1–2 (Jan. 12, 1974) (on file with author).
22 Revenues were $9.6 million, expenses $6.4 million, and profits $3.2 million.
23 Bogle, supra note 21, at 1.
24 See Memorandum #3 from Richard B. Smith, Esq., Davis Polk & Wardwell, Special Counsel, to the Independent Directors of Wellington Fund et al. 1 (Sept. 30, 1974) (quoting the board’s directive from their January 24, 1974 meeting) (on file with author).
25 John C. Bogle, The Future Structure of the Wellington Group of Investment Companies, Part I (Mar. 11, 1974) (on file with author).
26 Id. at 1.
27 Id. at 7–8.
28 Id. at 8 (emphasis added).
29 Id. at 45 (emphasis added).
30 Memorandum #2 from Richard B. Smith, Esq., Davis Polk & Wardwell, Special Counsel, to the Independent Directors of Wellington Fund et al. 1 (July 23, 1974) (on file with author).
31 Id. at 6 (emphasis added).
32 John C. Bogle, Character Counts 5, 6 (2002).
33 Wellington Management continues to manage Wellington Fund, as it has throughout the fund’s now seventy-five year history.
34 Source: Bogle Financial Markets Research Center. Benchmark return for 1945–1975 represents 35% of Ibbotson’s return for intermediate term government bonds plus 65% of the S&P 500 return. From 1976–2003, the Lehman Aggregate Bond index made up the 35% bond benchmark component in place of the Ibbotson figure.
35 Source: see supra note 34.
36 A similar investment in the average balanced fund would have grown to just $20.96—about 40% below Wellington’s value.
37 See supra note 14, accompanying figure, and adjacent text.
38 Sources: University of Chicago’s CRSP database (“CRSP”) (for MFS data) and The Vanguard Group (for Vanguard data). All expense ratios are asset weighted by year-end fund assets.
39 Sources: Wiesenberger (MFS Alpha period expense ratio), Lipper (MFS 2003 assets and expense data), and The Vanguard Group (Vanguard data). The MFS Alpha period expense ratio is the average of the expense ratios from 1943–1969.
40 Sources: CRSP (industry total net assets from 1961–1968 and MFS total net assets), the Investment Company Institute (industry total net assets from 1969–2003), and The Vanguard Group (Vanguard total net assets).
41 MFS executives now hold about 8% of its stock.
42 See Sun Life of Canada’s financial statements and annual reports for the years 1998–2002, which are available online at http://www.sunlife.com/slcorp/genericpage/0, 3324,bGFuZy1lbmdsaXNoX3NpdGUtc2xjb3JwX2Vudi1saXZlX3B6bi1nZW5lcmljX3NlYy0xOF9zdGF0LV9lZC1fbmF2LTMzMzI0,00.html (last visited March 24, 2004).
43 1970–1974 was the only period during which no Alpha model existed.
44 See The Vanguard Group, Inc., 47 S.E.C. 450, 451 (1981).
45 Clearly all major fund complexes were making such expenditures, but it was argued successfully, if problematically, that the managers were paying the distribution costs out of their own profits.
46 Vanguard, 47 S.E.C. at 450.
47 Id. at 470.
48 Id. at 456.
49 See Restatement (Third) of Trusts � 2 cmt. b (2003) (“Despite the differences in the legal circumstances and responsibilities of various fiduciaries, one characteristic is common to all: a person in a fiduciary relationship to another is under a duty to act for the benefit of the other as to matters within the scope of the relationship.”).
50 H.R. Rep. No. 89-2337, at 102 (1966).
51 Id. at 132.
52 Id. at 143.
53 Id. at 144.
54 Id. at 143.
55 H.R. Rep. No. 89-2337, at 145, 148–49 (emphasis added).
56 Id. at 149.
57 Id. (emphasis added).
58 Investment Company Amendments Act of 1970 � 36(b), 15 U.S.C. � 80a-35(b) (2000).
59 See id. � 36(b)(3), 15 U.S.C. � 80a-35(b)(3).
60 See H.R. Rep. No. 89-2337, at 149.
61 Id. at 151 (emphasis added).
62 Id. at 150.
63 Id. at 152 (emphasis added).
64 For those who think that asset-weighted expense ratios are a better test, the increase was from 0.51% to 0.95%—the same 86% increase!
65 Sources: CRSP (1965 total net asset and expense ratios for all diversified stock and specialty funds) and Lipper (2003 total net asset and expense ratios for all equity funds except balanced, flexible, and real estate funds, and funds for which Lipper contains no expense ratio data).
66 Bogle, supra note 16, at 256 (emphasis omitted).
67 In this acquisition, approved October 31, 2003, Lehman Brothers Holdings Inc. acquired Neuberger Berman Inc. See Press Release, Lehman Brothers, Lehman Brothers and Neuberger Berman Complete Strategic Combination (Oct. 31, 2003), available at http:// www.lehman.com/press/pdf/103103_LBNB.pdf.
68 Investment Company Act of 1940 � 1(b), (b)(2), 15 U.S.C. � 80a-1(b), (b)(2) (2000) (stating “the national public interest and the interest of investors are adversely affected . . . when investment companies are organized, operated, managed . . . in the interest of directors, officers . . . rather than in the interest of all classes of such companies’ security holders”).
69 See id. The italicized language would be added to the statute.
70 John C. Bogle, Common Sense on Mutual Funds 395–96 (1999).
71 Id.
72 See supra Part I.A.
73 See supra Part II.C.
74 See Bogle, supra note 70, at viii.