Marketing devalues funds, author says
Ellen Roseman The Toronto Star 12 May 1999
DO YOU THINK mutual fund firms have become money-hungry marketing machines? You're not alone.

John Bogle, founder of the giant Vanguard Group based in Valley Forge, Pa., has written a powerful new book that says marketing has replaced management in the mutual-fund driver's seat.

"The art of persuasion has crowded out the art of performance," he says in Common Sense On Mutual Funds (Wiley, $38.95).

You can get a taste of Bogle's book in Bloomberg Personal Finance magazine's current issue or online at His speeches are posted at Vanguard's Web site at

John C. Bogle, known as Jack, is a crusty septuagenarian who calls himself an outcast in the industry he helped shape for almost 50 years. He left active management after getting a heart transplant three years ago.

He first aired his ideas in a 1993 book, Bogle On Mutual Funds, but wanted to address the huge growth since then.

His new book starts with three full pages of endorsements from luminaries like economics professor Paul Samuelson, billionaire investor Warren Buffett and former U.S. treasury secretary William Simon.

To understand Bogle's argument, consider this paradox.

Why is it more profitable to own shares of fund managers like Mackenzie, Trimark or Investors Group than to own the funds they manage?

The way the industry is structured, he explains, there's a "profound conflict of interest" between fund managers and investors.

Mutual funds are owned by investors. But they are so many and so spread out they don't exercise working control.

Instead, control is vested in the external management company that provides essential services - such as investment advice, distribution, marketing and administration - in return for an annual fee.

Fund managers take investors' money (without their consent) to pay for advertising, then reap the benefits as the assets roll in.

"A dollar in profits for the management company is a dollar less for the mutual fund shareholders. It's as simple as that," Bogle says.

Vanguard, founded in 1974, is one of the biggest U.S. fund managers, with $450 billion (U.S.) in assets. It specializes in buy-and-hold index funds that replicate market averages.

The only U.S. fund firm that manages its own affairs on a cost basis, Vanguard boasts razor-thin expenses - as low as 25 cents on $100 in assets.

No Canadian fund manager comes close. The average domestic equity fund charges $2.20 on $100 in assets.

So, why isn't Vanguard in Canada?

A Canadian has organized a letter-writing campaign to put pressure on Vanguard to come north.

"John Bogle is the only advocate for the investor in the entire mutual fund industry. We sure need the likes of him up here," says Bylo Selhi, a do-it-yourself fund investor who's active in Internet discussion groups.

His name, based on the famous investment advice "buy low, sell high," is a pseudonym. While I've corresponded with him by E-mail (, I don't know his real name.

Bylo's Web site ( has lots of interesting stuff on investing. Click on "Bylo's 'VanMail' Campaign" to see his progress. It's slow.

His letters to Bogle and Vanguard CEO John Brennan have elicited responses from underlings.

The latest, dated March 19, says Vanguard has studied the Canadian market for some time. "We remain interested and, for now, we will continue to 'think about things.' Should we decide to move forward, we hope we could count on the support of investors like you," managing director Michael Miller wrote Bylo.

Vanguard's low-cost index funds are not registered for sale in Canada. You can buy them if you open an account with a U.S. discount broker such as Waterhouse Securities, owned by the Toronto Dominion Bank's Green Line arm.

"That's what I do," says Bylo, adding he's a highly satisfied customer of both Waterhouse and Vanguard.

But beware that by trading with an unregistered dealer, you are breaking Ontario's securities rules, which exist for your protection.

Do you support Bylo's VanMail campaign? If so, address your messages to me and I'll pass them on.


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