Vanguard may yet test Canadian waters
Jonathan Chevreau The National Post December 5, 2000
Peter Redman, National Post
John Bogle, founder of the Vanguard Group, was in Toronto yesterday for Bullseye 2000, a mutual fund industry conference.

In just his second official visit to Canada, U.S. indexing guru John Bogle did not rule out the possibility of Vanguard Mutual Funds eventually coming to Canada.

"I'm sure we will be up here but it will take time," the Vanguard founder told the Bullseye 2000 mutual funds conference in Toronto.

During question period, he drew laughs when he said he asked the people in his office yesterday morning the same question -- "Why aren't we in Canada?" The reason is partly costs and partly inertia. "We're extremely cost conscious and coming to another nation adds costs. Second, we'd presumably start a whole separate group of funds."

Mr. Bogle did not view the outcome of the U.S. election as critical to stock markets. "The idea that this election uncertainty has anything to do with the market is some form of lunacy. It's awfully easy for anything to knock the market down. It's really an indifferent market matter who is elected. If I were a betting man, which I'm not I, I'd guess probably [George W.] Bush would win."

While the popular wisdom is that a Bush victory may be better for the stock markets, Mr. Bogle said stock investors "should all be rooting for [Al] Gore. Under Democratic administrations, the real GDP of the U.S. grew 50% more and the stock market grew 17% versus 10%."

The bulk of Mr. Bogle's prepared talk stuck to the theme that runs through the several books he's written: Investment costs matter and in the long run individual investors who choose low-cost, index-based investments will have much healthier returns than actively managed investment funds. The latter cost investors dearly in terms of fund fees, transaction costs and taxes. The total annual expense of actively managed U.S. funds is 3.3%, he said, with taxes adding 1.6% for a total 4.9%. With the higher distribution costs in Canada, the average cost of active funds is 4.47%, or 5.7% after taxes.

The best index to participate in is the Standard & Poor's 500, Mr. Bogle said. He does not believe American investors need global investments outside the U.S. because large-cap U.S. stocks already have significant global exposure. Canadians should probably invest half outside the country, he said, split evenly between the U.S. and the rest of the world.

Investors have been led "down the primrose path" that the value investing style is superior than growth style. "I don't believe that's true. Investment styles come and go. The issue is not which one does better over the long run but rather how many shifts there are between the styles." If one style were demonstrably superior, it would have been bid up by investors.

Index funds have roughly equal proportions of growth and value, he said. Over the past two or three years he would have bet on value over growth. "It's taken a year or two for that to come true and now that's come true in spades." But in the long run, the transaction costs of switching between styles would probably eliminate any advantage.

 

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