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John Bogle: Can His Son Beat the Market?

As readers of this blog know, one of my inspirational heroes is John Bogle, founder and former chairman of The Vanguard Group. After working his way up through the ranks, Bogle eventually became chairman of Wellington Management Company, an actively managed mutual fund. In 1975, he launched the first retail S&P 500 Index fund. As they say, the rest is history. Bogle became the greatest proponent of index investing and the strongest critic of active management -- with special emphasis on high fees and the costs of turnover and taxes.

John Bogle Jr., however, decided not to follow in his father's footsteps. He began his career in engineering, then switched to investment banking, eventually running his own mutual fund based on a quantitative strategy (one based on "pairing earnings surprises, reasonable valuations and financial clarity"). In 2006, Morningstar gave the Bogle Small Cap Growth Fund (BOGLX) honorable mention as one of its favorite quantitative funds. I thought it would be an interesting exercise to see how John Jr. did in his "quest for alpha."

The first thing I did was to check the Morningstar rating. The fund is characterized as a small-cap blend fund. Unfortunately, given the current rating of just two stars, I don't think the fund would make any honorable mention list today. The next step was to check the fund's performance against two passively managed small-cap competitors, funds that Morningstar also characterizes as small-cap blend funds:

  • DFA US Small Cap Portfolio (DFSTX)
  • Vanguard Small Cap Index (NAESX)
The following table presents the results for the five- and 10-year periods ending March 18, 2011.

It's been almost five years since Morningstar gave the fund an honorable mention. And over the past five (non-calendar) years, BOGLX managed to underperform DFSTX by almost exactly 4 percent a year, and NAESX by an even wider margin. Over the last 10 years the performance is relatively better. However, the fund's performance still lags DFSTX by 0.87 percent per year and NAESX by 0.23 percent per year. It's important to note that the 10-year results include the period when Morningstar had already seen the returns -- it's always easy to identify the past winners.

The evidence suggests that John Jr. would have done investors a favor if he had followed in his father's footsteps. Or at the very least, had listened to what his father said about the evils of high expenses. BOGLX has an almost obscene expense ratio of 1.35 percent, more than explaining the underperformance over the full 10-year period.

More on MoneyWatch:
How John Bogle Changed the Investing World Book Review: John Bogle's Don't Count on It The Failure of Quant Funds TIPS Update for March 2011 Quest for Alpha: 10 Rules for Being a Successful Investor
Three ways I can help you become a wiser investor:

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