The Road Less Traveled
Mike - Apr 28, 2017

Jack delivered a landmark speech at the Morningstar Investment Conference on April 27, 2017:

The Road Less Traveled

The speech chronicles the remarkable rise of Vanguard and indexing from a sort-of-joke in 1974-76 to unprecedented industry domination in 2017, largely because of its mutual structure and its index strategy. What does that remarkable growth portend for the mutual fund industry? The eight highlights below summarize the key issues:

1. Index fund growth will continue. It remains to be seen whether broadly diversified long-term traditional index funds (TIFs) will lead the way, or whether exchange-traded index funds (ETFs) with their marketing attraction, substantial trading, and largely short-term focus, will dominate index cash flows. Pages 1-3, 10.

2. To meet the challenge of indexing, today’s active fund managers will have to develop a variety of appropriate business strategies. Page 10.

3. Active management is not going away, and large privately-held fund managers should pretty much stay the course, with few changes in their present business strategy. Page 7-8.

4. Conglomerate-owned fund managers (30 of todays 50 largest fund management firms) should adopt a “cash cow” business strategy. Pages 9-10.

5. Public policy—and the very words of the Investment Company Act of 1940—will compel fund directors to consider, not merely the business strategy of the manager, but the fiduciary strategy that places the investment interests of fund shareholders ahead of the business interests of fund managers. Pages 11-12.

6. Outside forces—a strong bull market and tax favored retirement plans—have driven mutual funds’ growth during the past 35 years. These forces will not repeat, and may even recede. Pages 11-12.

7. Fund directors, in general, have failed to measure up to this challenge, in part because fund boards are dominated by directors affiliated with fund managers. Such directors have two distinct fiduciary duties—one to the shareholders of the management company, the other to the shareholders of the mutual fund. Page 15.

8. Director lassitude has been reflected in the fact that more than 100% of the economies of scale in operating mutual funds have been garnered by fund managers. None of these economies have been shared were fund owners. (Since 1951, fund assets are up 5,400 times, fund expenses up 5,600 times.) Pages 13-14.

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