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:
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.
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