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Greed at the top is a mutual sin
Retired business editor Jack Markowitz's columns are published on Sundays and Thursdays. He can be reached via e-mail.
Investment managers take too much of the rewards that ought to go to shareholders, he says. It may be legal, but it's not right. Especially coming into an era of more -- and more urgent -- personal Investment.
Social Security is a long-term worry. "Guaranteed-benefit" pensions are drying up. "Guaranteed-contribution" plans like the 401(k) put more investing responsibility on ordinary workers. The company might help but won't do it all for them. Many newcomers will -- and should -- spread their risks in diversified mutual funds.
The argument Bogle makes in his book, "The Battle for the Soul of Capitalism," doesn't rest on just such egregious self-servers as Lawrence Lasser. The longtime chief of Putnam Management received $163 million in 1998-2002, but Putnam had to pay $193 million in fines and restitutions for bid-rigging and other sins. Lasser finally was ousted -- with a $78 million termination bonus. "Nothing," says Bogle, "succeeds like failure."
His argument is that mutual funds have shifted focus in a generation. They've gone from "stewardship of shareholder investments to salesmanship and asset gathering." A large asset base brings in higher fees and profits to a fund's management company. But the latter should be independent of the fund itself, Bogle argues. (Famed investor Warren Buffett agrees with him.) Directors of a fund should more often replace the managers that founded the fund!
Bogle points out that from 1950 to 2004, total assets in stock funds grew enormously -- from $2.5 billion to $4.0 trillion.A 1,600-fold increase. But fund expenses, including sales charges, redemption penalties and too much turnover of securities, grew faster, from $15 million to $37 billion, 2,400-fold.
"Where are the old economies of scale?" asks Bogle, who says it takes no more managers to run $5 billion than $1 billion.
He says that from 1985 through 2004, the stock market produced 13.2 percent total gains a year on average, the average stock fund just 10.4 percent. A 1985 investment of $10,000 produced a paper profit of $109,800; the average fund, $62,900. "The investor put up 100 percent of the capital, took 100 percent of the risk, and collected only 57 percent of the profit," Bogle says. The rest went to management and expenses. Too much, he contends. He'd like a new national commission to set standards for financial "intermediaries" like mutual funds.
But that of course would offend not only the pay-and-perk aristocrats among fund managers but countless folks simply who prefer market freedom: in fact, the very system that brought low-cost "no-load" funds into being, of the very sort pioneered by John Bogle's own Vanguard Inc. He does well to air the greed-at-the-top issue, however. Among mutual funds, too. For shame.
More Columnist Jack Markowitz headlines
- Only low taxes can save dying big cities
- Paul's good health care idea won't ever survive
- Criticism of bankers off base
- Investors often run from jaws of the abyss
- Inflation written all over 'wall of worry'
- Maybe women CEOs could have thwarted the meltdown
- Up next for rescue is retirees' trust fund
- Turning a page on Carnegie
