The reality is that the idea was so bad or so ill-received, that the second index fund
wasn't started until 1984 eight years after the underwriting in 1976.
And it was also a failure.
And the third one went out of business quickly, and then finally by the mid-90s, it started
to catch on.
People saw how it worked and it was working beautifully by the 90s after a bad start and
it was a bull market, these large cap stocks were doing very well.
We eliminated transaction costs because the index doesn't do any trading.
We finally got our cost down.
I can't remember what they were in the early 90s, but let's say the cost... you could get
at one of our index funds for 15 or 20 basis points, and today you can get our S&P 500
index, and some of the others, with the minimum investment of $10,000, for 5 basis points.
You can own the U.S. stock market at a cost of 5 basis points with no additional cost
for portfolio turnover.
And that is just a return builder when the other, our competitors, have say close to
a 1% expense ratio and probably 1%, or half of 1% at least, turnover cost, portfolio turnover
internal cost.
And then often offered a sales charge which spread over time is another 1% let's say.
So, we're operating to give the investor 7% stock market, 6.95%, and the others taking
2.5% of the 7% are giving 4.5%.
Put that in a compound interest table and you are going to get at the end of 25 or 50
years, maybe four times the amount of capital that you have with the costly fund.
And this is not just me speaking, Scott.
This is Bill Sharpe, the Nobel Laureate and he has been on this game, cost matters game,
almost as long as I have.
Almost every firm, well, every firm in the industry but Vanguard is operated in a way
that puts the manager in the driver seat and not the fund shareholder.
This is the way the industry is organized, and the fund directors, even the independent
directors seem powerless to stop it.
Maybe they don't know, maybe they don't care, maybe they don't look at themselves that way.
But it's amazing that this idustry has gone from, oh I guess, when I came into it in 1951,
the average expense ratio of a fund, weighted average expense ratio was probably 50 basis
points.
And the industry has gone from $3 billion to $16 trillion, and the expense ratio, the
average weighted expense ratio, has gone up to for managed equity funds to 85.
Now how can that be?
Why didn't somebody say, let's give some of these economies of scale which are enormous
in this business to the shareholders of the funds, instead of the shareholders of the
management companies.
And the management companies are hot stocks.
You just track them.
There are half a dozen, a dozen of them my guess, out there, and with a few exceptions,
over time they do much better than the shareholders of the funds.
And I think that's – the industry is going to have to start to think more about mutuality
and more about at least the minimum, more about sharing even in retrospect.
So, would be a painful thing for the managers, the economies of scale which are boundless
and huge, and that's a big step for the industry to take.
The industry won't take it, but one fund will and then another will.
And right now though, the fees are still, is much higher than they were when I came
into this business, and they've got to come down, because the fees are the differences
between investment success and investment failure relative to your peers.
I won't ask you to endorse a competitor.
But are there firms out there that don't have a mutual ownership structure that you think
do a good job of kind of keeping the cost down for?
Well, I don't see anybody is really doing a good job of keeping cost down.
And people, let say they have low cost, mean they are below the industry norm, and the
industry norm for the average actively managed funds, I think I said 85, that's a number
out of the ICI, taking index funds out of the equation.
And so if you're at 65, you think of yourself as low cost.
For god sake Scott, don't compare yourself with Vanguard, who are going to run the index
funds at 5 basis points rather than 65 and run the whole complex at roughly 14 or 15
basis points, counting the managed funds and that's very low costs.
So, I think somebody ought to – maybe Morningstar would be willing to do this and they call
them high cost, average cost and low cost, I think there needs to be a fourth category
called very low cost and there will only be one firm that's in that category.
Now that having been said, if you want to be in the index fund business you have to
have low cost to compete.
So, Fidelity has very low cost on their index funds, very competitive, totally competitive
with ours, but they're when you think about almost the only firm that has a significant
index fund business unless you're an indexer like BlackRock or State Street, Vanguard and
so on.
And so they don't – they have to compete their but they don't want to compete with
the rest of their funds on costs.
Something has to happen to bring that down, I mean it's kind of amazing to think I mean
I think at T. Rowe price that has a bunch of index funds, they have costs of 20 or 25
basis points I mean that seems well the 25 basis points is 400% bigger than 5 and I don't
– I honestly don't see how the directors can accept that and they are by the way pretty
good on this.
There are funds out there or were at least that had a sales charge on the index fund
of 5% or something and a 1% expense ratio.
So, you're going to the index fund, you're behind the eight-ball and every year you fall
further behind the eight-ball.
Somebody asked people at Wells Fargo how their fund could be so expensive, and this was some
years back and their PR person said, I think we're getting good judgement, said, you don't
understand there are cash cow, they are Wells Fargo's cash cow, the fund should be shareholders
cash cow unequivocal.
Did I make myself clear, Scott?
I'm getting it.