John C. Bogle. The mandate for the shareholders funds

John C. Bogle. The mandate for the shareholders funds

Until a heart transplant in 1996, Okon K. Bogle managed by mutual funds, whose total assets were the second-largest, behind only the "Fidelity". Bogle founded the "Vanguard Group" (The Vanguard Croup,! Ps.) In 1974. Over the next 20 years, its assets grew to 100 billion home. and much has exceeded 200 billion home. in 1998. One of the keys to success Bogla - to reduce costs. For example, the average value fund, "Vanguard" was less than a thirdthe industry average values. One reason is that Bogle and his company adhere to the concept of index funds, which they successfully run at about one-fifth the average cost. In addition to significant adaptations to computer analysis and transaction problems, Bogle sought to reduce costs in other ways. The inclusion of light in the offices is controlled by motion sensors, there is no unnecessary amenities such as private dining rooms, and no one is allowed to fly first class.

Bogle, whose grandfather founded the "American ken" (American Sap), knew that such frugality when it in less than a disciplined father lost the family fortune during the Great Depression. Fortunately, he was able to study at Princeton University on a scholarship, his thesis he wrote on mutual funds. After college, Bogle immediately went to work for "Willington Management", which convinced his employer to establish a "Windsor Fand." He worked without sleep and written prospectus for 24 hours. The hard work took its toll and Bogle at the age of 30 years suffered a heart attack, but, contrary to your doctor, immediately returned to work.

Bogle stands for index funds because he believes in efficient market - half of the market investors on the impact of losing the market, while the other half won - so he decided that, since I can not beat the market, it is better to join him. In 1976 he created the foundation "500 Index Trust" (Index Trust 500), which was modeled on 5AR 500. Over the next 15 years, its revenues exceeded 85 percent of all diversified equity funds. While Bogle acknowledges that there are some money managers who can beat the index funds. The problem of an investor to find them in advance. Bogle sincerely believes in the need for investors to be alert and in the "Mandate for stockholders funds," he expounds his four rules: (1) reasonable and (2) to be thrifty (3) to be active (4) to be skeptical.



Fault, dear Brutus, lies not in our stars but in ourselves. "So said the main character in Shakespeare's" Julius Caesar "... mutual funds ... industry can be significantly improved and can offer much better opportunities to investors. Positive changes occur but only if we are blamed for the shortcomings of the industry is not in our stars but in ourselves as shareholders. If enough investors to require mutual funds to improve the industry, we get the best mutual fund industry. All you have to do - to defend the rights of investors.

For shareholders with a relatively small investment it is difficult to promote change. In the end, the average investor has, perhaps, $ 10,000 invested in a 500-millionodollarovy mutual fund, which means the voting power of about 2 / 1000 of 1%. But if you feel like doing it and that even one vote may be decisive, any change which would require a sufficient number of shareholders of a mutual fund will necessarily be accepted. I am not suggesting that mutual fund shareholders to work together with each other. Such a proposal would require the organization of tedious work and patience. Rather, and suggest that all shareholders are simply acted independently, but together, according to their own financial needs and best interests, and then the mutual fund industry will soon improve.

In considering what suits your best interests as an investor of a mutual fund, and propose to observe four basic rules: (1) be reasonable and (2) be frugal (3) to be active (4) to be skeptical. On the following pages and look at Yai rules as if they were mutually exclusive, but a reasonable investor would wish to build into their investment programs, all four.


Intelligent Investor
It seems almost naive to suggest that a reasonable investor to - wise enough to rely on your own common sense and good judgment - a mutual fund industry was the best possible investment environment. Nevertheless, I believe that this is so. As the industry is exceptional. but responsive to the needs and demands of investors. With today's sophisticated direct marketing techniques and an energetic, highly motivated sales staff, the industry responds to consumer demands no less quickly than any other company in financial services, and which ever saw the problem is that investors generally require irregular things and for the most part ignore the right thing. Therefore, any improvement in this industry depends primarily on the change in the attitude of investors - the wise and prudent action when choosing stocks and mutual funds owned by them.

Although it may seem trivial to suggest that a reasonable investor would begin by reading prospectuses Fund, namely mo is the real starting point. What you should read the prospectus? Of course, not all the prospectuses of all funds in the industry, or even 1,000 or so funds are included in reviews of the leading statistical services, or even hundreds of dealing with, say, if you decide to stop them, oebychnymi shares. Perhaps it suffices to choose a dozen avenues of equity funds, half the number of bond funds and half the number of funds of the financial market. This gives you a little more than 20 prospects. They need to work, paying attention to certain important points, this is a worthwhile investment of your time.

How to start the process of selection of sample brochures? The most logical starting point - the study of certain funds prospectus, including the well-known mutual fund complexes. Most stock systems running on 50 or more years, suggesting that something they are doing right. But do not rule out smaller funds or fund families, which you may have learned through the service evaluation of mutual funds and financial periodicals, are often helpful advice of friends - experienced investors as well as suggestions for your lawyer or accountant. Investors need more than professional advice, helpful services and charges can have a recognized financial analysts and stockbrokers.

How should a reasonable investor to read the prospectus? It would be unrealistic to assume that you read the whole document from start to finish. For long-term investor is likely to have enough knowledge purposes of the fund, investment policy, profits, risks and overall costs (collection by purchasing shares, the annual costs for collecting the redemption of shares, etc.), more short-term active investor should also know key principles of the fund, for example, return the shares as to exchange shares for shares of another fund, as well as any operational constraints of the collection at the redemption of shares or the restrictions on the frequency of exchange transactions in the fund.

Narrowing the field of study, go to the additional information supplied by the sponsor fund, including a precise description of fund performance statistics and financial information, giving a sufficient but not excessive attention to the previous results of the fund, including capital gains and income, and following the selection criteria, you 're ready to make your choice of funds. A reasonable investor would look up this information and make sure that all of it, or at least most of it is available. If not, then s sea plenty of fish, and there are many such funds from which to choose.

Required to do all this work and ask for useful information, including a compound rate of return the fund over a long period of comparative standards used to evaluate these results, a clear statement about the risk and complete picture of cost factors. If enough investors follow this process of selecting funds based on the nature, breadth and veracity of the information they provide, ultimately, will remain only in funds that make adequate information available to investors.


THRIFT INVESTOR
If investors in mutual funds will become more knowledgeable about the costs paid by them in the form of fees for the sale of shares, management fees and other expenses of the fund, and will then act on this knowledge, these costs are, of course, be reduced. It goes without saying, If you only buy shares at a lower cost of funds (perhaps due to withdrawal of your investment funds from more costly), sponsors of mutual funds will quickly see what happens. They realize that the cost reductions will help investors to increase the level of their managed assets, while the rejection of the savings will lead to a constant outflow of capital

This is not a utopian concept. To some extent this scenario in the industry of mutual funds already deployed. Take a look at the foundations of financial markets. Broadly speaking, the lower the level of factor costs on the fund financial markets, the more assets it attracts. All funds are the biggest factors expensiveness at or below the industry norm. As far as I'm concerned, is now considered out of expediency charges, to which I referred earlier: temporary waivers of fees actually attract assets. But when the sponsor ceases to fund defray the expenses of the promoted their costs on the fund and ratio increased to "normal" level, much of the money raised to fund the reduced costs, luring other funds with longer-term low-cost and high yield, That this pullback in Cash flow is the case, despite the fact that the sponsor "forgets" to notify its shareholders to increase the fees, suggesting that, at least in the arena of the financial market, investors are not only economically, but also clearly know where and how much earning. Strictly speaking, the skin formed a first financial market funds, some of them charge fees when selling shares, but this cost was simply too heavy for market acceptance, and this practice soon disappeared.

In the arena of the importance of bond funds to be thrifty, it seems, is not fully understood. It seems as though the central theme is a waste, not thrift, It's surprising that so many bond mutual funds with assets of over one billion dollars are annually spending more than 1.25%. At a cost, if we assume that the profit before tax is 7.0%, expenses eat up about 18% of the profits the fund, cutting the dividends distributed to shareholders in the fund the same 18%. It is amazing to see that more than half of all bond funds actually sell their shares, using the collection for sale net result of this - the investors earn a net income (assuming the load equal to 5%) in only 95% of its assets. If you hold shares of bond funds for five years, the result will be an annual sacrifice of a 1% yield. With a coefficient of 1.25% costs on the combined annual costs of the fund and fees from sales during the five-year period is 2.25%, eating nearly a third of the fund earnings before tax of 7%.

As I noted earlier, the possibility of any manager of bond funds to earn a profit sufficient to offset the costs of these amazing, very limited. Thus, despite expectations, almost 70% of assets in bond funds is managed by funds with additional operating costs and only about 30% of the funds is without them. There are indications that these percentages are closer, but the major change can occur only when the investors in bond funds will act in accordance with its momentum thrift.

In the arena of equity funds of funds results collected and does not charge a fee for the transaction costs at the level before income taxes from sales of shares in the comparable. After accounting for taxes on sales of shares funds do not charge a fee for the transaction costs have a distinct advantage. The market seems to see the difference, and almost 40% of the assets of all equity funds represented by the funds without paying for operating costs. Most stock funds with very high rates of operating costs (for example, more than 2.5%) has attracted a limited amount of assets. It is difficult to determine, however, where it starts the connection between high spending and low results and the low capital base. Nevertheless, clear to me that in the coming years will develop two trends: (1) all stock funds - particularly the mainstream funds - will feel the pressure of the cost of increasing price competition in the markets, (2) if we assume that index funds are "working" most assets will attract those who will not charge for the sale of shares and have the lowest operating costs.


ACTIVE INVESTOR
Becoming the owner of the shares of a mutual fund, you get "some neotemlemye law." Among them the right to vote by proxy, the right to express opinions to management and, finally, the supreme law, the right to "vote with their feet", withdrawing your contributions to the fund. This last option is very scary sponsors fund. The ego does not only imply that they somehow fell short of expectations of the investor, but also reduces the amount they receive from the fund management.

The right to vote is very important, because the increase in management fees must be approved by shareholders of a mutual fund. (It is curious, but it's true for almost unheard of proposals to reduce the fee) From this it follows that since investors - after reading the prospectus of the fund - tacitly approved the management fee when bought their shares, they will want to examine carefully any proposal to change conditions of this contract. Each shareholder should vote and vote wisely.

To do this you will need the full and truthful information, why it is necessary to increase the fee. If the attorney is no such information should automatically vote against it. Sadly, many provide a power of attorney is not adequate disclosure of reasons. Start with the first page. It often contains a proposal "to vote to amend the agreement to fund investment advice." Rarely, if ever, talks about "voting for an increase of 25% of the fee that you pay the Investment Fund Manager." It is therefore necessary to carefully study the details of proxy.

Valid reasons for management to increase the rate of interest would be "the need to have the resources to hire additional investment professionals," or "to increase the volume of services provided to shareholders." Such reasons, however, put forward are very rare. Most often you will see that after a long consideration of the Director Fund approved an increase in fees demanded by the company's management as well as rates of pay in the fund below the industry norm.

This reason looks more like an excuse. (Do not be half the funds in the industry have always paid "below average" and the other half always have higher than average salary?) The real reason for most increases in interest rates is to improve the profitability of the management company. Remember: the amount of compensation is automatically increased in dollars - are often extremely hard - e increase the fund's assets, although in many cases, the interest rate on the increase of the fund smoothly decreases. While higher income fund managers are not necessarily wrong in theory, shareholders are entitled not only to the true statement concerning this purpose, profit, and clearly the financial performance, showing gains, the consultant receives from the fund, both before and after the increase in wages, the nature and extent Fund expenses, and rate of return, which he achieves in the management of the fund.

If the consultant spends $ 0.50 of each $ 1.00 fee for fund management, the level of profitability before tax of 50%. If this margin will increase to 75% - a striking increase, but hardly unprecedented - so be it written. Although being a huge compared to most other industries, the level of return of 50% is not unusual among the big mutual fund complexes. To earn your approving voice, the management company should provide these numbers in terms of profitability (not just for fund in question, but for all funds of the complex in the aggregate) and to justify their usefulness.