John Bogle: "The Silence of the Funds"

John Bogle had the following to say in this Morningstar interview:

"I am appalled by what has happened in our industry."

Here's why. Bogle says that back when he was doing his Princeton thesis in 1951, the mutual fund industry owned a small percentage of stocks. Now, mutual funds are the biggest owner of stocks. In fact, according to Bogle, large institutional money managers of all kinds now own about 66% of stock.

 "...a big turnaround over the last half century. And they are silent."

 Bogle has a chapter with the title "The Silence of the Funds" in his new book The Clash of the Cultures. 

In the interview, he also said this about Benjamin Graham:

"...in his first book, about a third of that book was dedicated to the role of stockholders and corporate governance, and it's hard to find a word about that in any other book, except, of course, the Bogle books.

But we have a responsibility. We have the rights of corporate ownership; we better exercise the responsibilities of corporate ownership. There is a lot at stake here because the corporations have the same agency problem and those managers want to put their interests before those of their shareholders. I mean this is not black and white, I can see that. But they get too much room to run without any oversight, and you always need oversight. And if the shareholders want the best oversight, the government can only do so much, regulatory bodies can only do so much."

Bogle adds that owners could do much more yet, for a variety of reasons, simply do not. The largest institutions are certainly in the best position to do so considering all the stock that they now own.

In the interview, he talks about some of the reasons why they do not but, to me, a good bit of this comes down to the increasingly short-term focus by participants in the capital markets. Fewer long-term shareholders. More interest in near-term price action. When, in general, a large proportion of participants do not intend to own pieces of a business -- shares of stock -- for very long, it's likely they'll expend far less time and energy carefully thinking about long-term effects and outcomes. Unlikely they'll put much into assuring that responsible governance is in place. Certainly less than a true long-term owner.
(Consider how the average person tends to treat a rental car versus a car they own. Well, maybe too many of our corporations are receiving what's equivalent to the "rental car" treatment.)

In this part of the interview, Bogle points out that the average turnover of a mutual fund portfolio is nearly 100 percent.

"...and that means they hold the average stock for one year. That is unequivocally speculation, and it costs money."*

Those frictional costs are very real. Yet the "silence", as Bogle describes it, by large institutional money managers (those who control roughly 66% of the stock) may actually be far more expensive even if in difficult to measure ways.

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To many ICap's shareholders , TTB is their Oracle

Perhaps you have heard of the Oracle of Omaha, the namesake accorded to Warren Buffett. I was at the AGM this morning, my first attendance and the thing I can say is that Tan Theng Boo ("TTB") is like the Oracle of Malaysia for many of these shareholders.

In fact, the presentation provided by TTB himself is loaded with Warren Buffett's quotes, such as - "Rule No 1: Never Lose Money, Rule 2: Never forget Rule No 1" and "Price is what you pay, value is what you get" and many more. I would say that much of TTB's investments philosophies and actions is trying to resemble Buffett's. He even claimed that to save costs, his prospectus and Annual Reports are in black and white (as color printing is more expensive) - resembling the same careful spending trait that Buffett had on his vehicle, Berkshire Hathaway.

However, few differences that tell are Buffett's Chairman's statement to shareholders consists of more than 50 pages each year and spends a lot of time explaining his investments rationale and why he invested in some of the portfolio companies. TTB is much stingier in his Annual report statement ditching out less than 2 pages each year. I think that the iCapital newsletters subscription would probably be where he is concentrating on his write-ups.

Another difference is that for of Buffett's hardcore believers, they would be willing to buy just 1 share of Berkshire Hathaway to be able to attend his AGM. (Berkshire Hathaway's A share costs USD127,000 by the way) Well, TTB is still far from that, but there are still some hard core supporters (I would think 500+ or maybe many more) as shown in the majority who supported him during the AGM.

In fact, some of them complained that the AGM this time around is time consuming and non-beneficial as most of them were there in most of its previous AGM's to obtain their annual tips from their Oracle, not to really vote. This time around, their presence are to support their oracle as the threat of resigning was too much for them to absorb. One came out to actually say, "No Tan Theng Boo, No ICap." - and its the end of the world?

I did not stay to learn about the results of this unusually extended AGM as I had to rush off to another event, but I can guess that judging from the support provided to TTB - rightly so - many of them would stay thick and thin with him - to the extent that he has become "Godly".

I would have to say, at the end of the day, I am impressed and despite the initial thoughts of voting in some of the so-called non-friendly Directors to Capital Dynamics', at last I changed my mind. However, I doubt that I can be so attached and would still be looking for opportunities to sell whenever the fund is close to its NAV - unless some of the issues that I have mentioned before are really addressed.

Whatever it is, I guess I am a different type of investor anyway, as I am the type who is hoping to control my own destiny, than relying on another to do so for me. Err someone said that already, and that someone is Jack Welch.

And hah! hopefully this is my last article about ICap for a while as some readers would be bored with these articles already. I would just concentrate on researching something else myself.

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