13 October 1999

Global Investing - US Mutual Fund Review

It seems fitting that in the year John C. Bogle is retiring as a Vanguard Group director, we should mark the elegant innovation he introduced to the mutual-fund industry nearly 25 years ago.

Mr Bogle is the founder of Vanguard, and it was he, in 1976, who started the first index fund available to the general public. Pegged to the big-company Standard & Poor's 500-stock index, Vanguard's First Index Investment Trust, as it was called then, broke new ground with the idea of a low-cost fund without a manager at the helm selecting individual stocks. In its first year, it attracted a disappointing $11 million (10.2 million euros), enough to invest in only 280 of the index's 500 stocks.

Now, the Vanguard 500 Index Fund has assets exceeding $90 billion, and across the industry there are several hundred other index funds that track nearly everything (and even more such index funds on the way). New money flowing into the U.S. index funds for this year through Aug. 30 hit $44.59 billion, according to Financial Research of Boston; that is already ahead of such sales for all of 1998, when index funds attracted $42.47 billion. And this year's sales numbers show that 37.6% of all net new money is going into index funds - that's nearly $4 of every $10 invested, twice the rate in 1998. A decade ago, only 2.1% of fund sales landed in index portfolios.

As important as the sheer number of index funds, and the huge level of assets in them, is the impact they are having on all funds. As columnist Roger Lowenstein said in SmartMoney magazine, Mr Bogle established the S&P 500 index "as a viable option, rather than as just an abstract benchmark." And with the average at last within investors' grasp, "below-average performance became unacceptable."

In recent years, funds headed by stock pickers certainly have underperformed the S&P index, sometimes by a wide margin. While in 1991 to 1993 about 60% of actively managed general stock funds beat the benchmark, that percentage has dropped precipitously. In 1997, for example, only about one in 10 funds outperformed the index, according to fund tracker Lipper Inc. As of Sept. 23, Lipper says, 39.23% of actively managed funds were beating the index this year, by far the best showing in nearly six years. Clearly, a lot of funds have been plagued by poor stock picks, but their relatively high costs don't help, either. On average, actively managed funds charge 1.44% of assets as an expense ratio, nearly a full percentage point more than the average index fund.

For most of this year, the Vanguard 500 fund has pulled in an average of $1.3 billion a month, although just $700 million arrived in August as the S&P 500 index retreated from a July high, said Dan Wiener, editor of an independent Vanguard newsletter.

(Copyright (c) 1999, Dow Jones & Company, Inc).

Source: WALL STREET JOURNAL EUROPE 13/10/1999