CAMBRIDGE, MASS. — Like father, like son - sort of.
Both John Bogles - Jr. and Sr. - blend a formulaic, dispassionate approach to investing with a passionate concern about minimizing customer costs.
But the son hasn't exactly walked in his father's footsteps.
The senior Mr. Bogle built the Vanguard Group into the nation's No. 2 mutual-fund house by offering index mutual funds that mirror the overall stock market while keeping expenses at rock bottom.
John Bogle Jr. thinks he's found computer models that can beat the market - and so far they've worked.
That doesn't mean he dislikes index funds. They're a staple like corn chips. What he offers, he says, is "the salsa on the chips."
Lots of funds use computers to screen the stock universe for promising picks. And some die-hard "quants," like Bogle, rely totally on such data models.
But the funds Bogle runs at numeric investors n/i (800-686-3742) in Cambridge, Mass., have beaten most peers since their May 1996 launch.
Since then, n/i Growth & Value Fund has gained 29.5 percent (through November), versus 23.3 percent for the Standard & Poor's Mid-Cap 400 index, which it aims to beat. And n/i Micro Cap is up 34 percent, versus the Russell 2000 Growth index's 3.3 percent.
Whether that success continues, Bogle says, depends on correctly identifying inefficiencies - underpriced stocks - in the market.
"It's the opportunities that are created by the humans in the market that we capitalize on," Bogle says. "We believe that securities analysts chronically and persistently tend to revise their forecasts [of company profits] too slowly over time."
That's the kind of pattern n/i looks for in "growth" stocks - fast-growing and trendy firms such as Netscape and America Online in the Internet arena.
For more traditional "value" companies, such as Exxon, there are other kinds of inefficiency, such as when investors overreact to bad news. Again, Bogle says this occurs persistently and predictably.
What he and two co-managers do is fine-tune their growth and value models, using past market data. And they decide which model, or what combination of the two models, best forecasts the price of specific stocks.
They must act quickly on the results. "Exxon doesn't stay underpriced for long," he says.
Keeping costs down
That's where Bogle's passion for minimizing costs comes in.
The issue isn't annual management expenses - n/i doesn't differ much from the typical fund in that area - but "transaction costs."
Here's the idea: Say you identify a hot stock to buy and you want to put 1 percent of fund assets into it.
Transaction costs are the difference between the stock price the day you decide to buy and the price you end up paying after all shares are bought.
If you're buying half a million dollars worth (that's about 1 percent of assets at n/i Growth & Value), you can buy the position fairly quickly, over a few days. Your own orders won't push up the stock's price very much, and you may get in before other smart investors get the same idea.
But if you run a fund with billions of dollars in assets, it's a different story. These trading costs are a burgeoning concern at many fund and brokerage houses.
But Bogle says many funds don't want to talk about how their size diminishes investor returns.
Last year, Fidelity closed its $64 billion Magellan Fund to new investors, lightening the load a bit.
Bogle closed two n/i funds when they reached a paltry (by industry standards) $100 million in assets. Those funds - Growth and Micro Cap - invest in small or very-small companies.
New fund opened
The company's new fund - Larger Cap Value - will stay open longer, perhaps till it hits $750 million, because it invests in large companies with a higher trading-costs threshold.
Each n/i fund splits assets pretty evenly among 100 or more stocks, and a variety of industries. And they always stay fully invested in stocks.
"I don't worry" about where the market's headed, "and I strongly encourage our investors not to worry about it," Bogle says. His advice: Stick with a stock/bond mix that's as "aggressive as you can sleep with."