John Bogle, the founder and former CEO of Vanguard, the second largest asset management company in the world, is worried about the firm's gargantuan size. In an interview with Morningstar’s Christine Benz, its director of personal finance, Bogle said of Vanguard, “the economies of scale just can’t keep going on much longer.”
Asked how big is too big for the mutual fund giant, Bogle said he’s “tempted to say $4.7 trillion.” That’s exactly the amount of assets the firm manages, as of Sept. 30, according to a spokesperson.
“Let’s take the foot off the accelerator and ease it gently over the brake,” said Bogle, adding that this would be difficult to do. “We all know it’s going to have to be done sometime. I mean, maybe 25 years from now.”
Bogle explained that the size of a mutual fund company can pose regulatory problems because under the Investment Company Act of 1940, no mutual fund can own more than 10% of the voting shares of any security. A fund company can create another index fund to get around that restriction, but eventually that limit could apply to all of a fund company’s assets, said Bogle, noting that such a limitation would require congressional action to change the law.
The champion of index funds said the index business is now an oligopoly consisting of Vanguard, BlackRock and State Street and “basically … a vested public interest …. industry, which owns 35% of all the stocks in America. That's not going to go away.”
Although the second largest asset manager (after BlackRock), Vanguard is “the undisputed leader” in the index fund category, according to Morningstar's latest asset flow report. It also manages about $1 trillion in active assets.
Bogle expects that indexing will grow in the industry but at the same time come “under the microscope.”
“We at Vanguard have had the white hat in this industry," said Bogle. “I don't think there's any question about that, and so we ought to be abundantly careful and I think we will be.”
Vanguard responded to Bogle's interview noting that he retired as CEO more than 20 years ago and, "as he stated in the Morningstar interview, is not involved in the management of the company."
The company's statement said that "growth is not a goal ... but an outcome of delivering clients superior investment performance and quality service at a low cost to our clients" and noted that the largest holding of any one security in its largest fund, the $620 billion Vanguard Total Stock Market Index Fund, is Apple, at 2.4%, which is far below the 10% limit that Bogle cited.
The statement also said Vanguard "will continue to lower the cost of investing for our clients, as we have done for the past 40 years," and it listed additional services it provides investors including its Personal Advior Services, expense cuts for funds and ETFs and a cybersecurity program.
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