Vanguard head talks of his market strategy
Call it the ''Medical Science Technology Electronics Data-Processing Bio-Genetic Fund.'' Last year such a mutual fund would probably have drawn millions of dollars of investments and its asset value would have multiplied and then multiplied again.Skip to next paragraph
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Even so, John Bogle would not have been enthusiastic about it.
''We've been very apprehensive about jumping on that bandwagon with speculative funds,'' says Mr. Bogle, president of the Vanguard Group of Valley Forge, Pa., a longtime stalwart of the mutual fund industry. Bogle calls market speculation ''clearly extreme on the technology/new issues side of the market.
''We may be completely wrong on that hypothetical 'Bio-Genetic-etc.' fund,'' he continues. ''Someday we may start one. One rarely says never in this business. But it seems as if the odds for having a distinguished-performance aggressive growth fund at this level of the market are not high.''
To Bogle the aim of the mutual fund family is to bring out products that will survive wild market fluctuations. Unlike many of the upstarts in the industry, Vanguard's fund family has spanned a series of market downs as well as ups.
''Looking behind last year's frothy market,'' Bogle says, ''our strategy is not at all based on thinking we can outguess the market. It is based on a feeling that the best way is to build and maintain mutual fund capital. We are emboldened a little bit in that we are doing very good volume and good performance in (nonspeculative) equity funds.''
Bogle advises that it's a good idea to put the performance claims of a mutual fund against the backdrop of 10- and 20-year stock market performance.
Every year from 1970 through 1982, the mutual fund industry experienced net capital outflow. During the past year, however, it has experienced a boom, especially in the speculative funds.
Assisting this boom, Bogle notes, is a sometimes naive financial press which publicizes funds that have done the best in the last three weeks or two months.
''Somewhat more insidiously,'' he adds, are the assertions of the funds themselves. ''Some are advertising performance which may begin last Oct. 1 or this Jan. 1 or July 23, 1946, or '56, or right at the bottom of the bear market in 1974. I see too much of that in the market, people thinking there is some way to make a lot of money quickly.''
The important point about most mutual funds, Bogle says, is long-term performance, because mutual funds should be long-term investments. Though inflation might erode yearly appreciation in some conservative funds, he contends, over the long term (20 years) the mutual funds will more than offset inflation.
Over the past year, aggressive growth funds have been highly popular. Many market-sensitive investors, no longer able to enjoy 10-percent-plus yields on money market funds, are trying to maximize yields by timing the markets using mutual funds. But when this happens, substantial capital flows into and out of a fund, causing substantial turnover.
The two most likely Vanguard funds for market timers to use are Vanguard Explorer and Vanguard Index Fund. Therefore, Bogle allows no timing (no switching by telephone) on these. He says Explorer needs stable capital ''to conduct an intelligent investment program.''
Since December, Vanguard has established three highly conservative funds that are firsts for the industry:
* A short-term portfolio. This is a compromise between a money market fund and a bond fund and currently has $160 million in assets. With three years' average maturity, this fund provides a stable dividend and a stable principal. In a money market fund the dividend is variable and the principal is fixed. In a bond fund the principal is variable and the dividend is essentially fixed.
* An insured money market fund. Using private insurance provided by the St. Paul Insurance Company, it seeks to eliminate any risk in the change of the $1 asset value. Even a government money market fund could conceivably change in asset value, because of fluctuations in the price of government securities. This fund offers an extra level of insurance to guard against that. Because the insurance costs around 35 basis points (just over one-third of a percent) a year , it yields 35 basis points less than the regular money market fund. Assets now stand at $20 million.
''The market reception for that has been kind of quiet,'' Bogle admits. ''Presumably an investor is saying he doesn't want to pay the risk premium because he doesn't envision himself taking any risk, and I think that's right. But the assumption is that at some point there will be investors who want that extra level of protection.''
* An adjustable-rate preferred fund. This fund, underwritten at $32 million in July, is designed for corporations to pass through the 85 percent federal tax credit on dividends. The idea is that while a corporation can assume about a 10 percent return on a money market fund and an adjustable-rate preferred fund, it will have to pay a 46 percent tax. The corporation will be left with $5.40 out of the $10 it makes on the money market fund. But on the adjustable-rate preferred fund the corporation pays only a 6.9 percent tax. So it would be left with $9.31.
Vanguard's Explorer Fund is, in fact, a high-risk growth fund. But the company has elected not to promote it during the last year. Bogle's reason: ''Other people's money is not soup or soap. I think there is a place for some restraint when you're dealing with other people's money.''