Bogle: Buy Corporate Bonds With Rates Low
September 12, 2012
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John Bogle’s latest book, “The Clash of the Cultures: Investment vs. Speculation,” is a must-read for investors everywhere. His multidecade career in the fund industry resonates on every page, as he continues to preach the gospel of low-cost index funds and diagnose what ails modern markets. When IndexUniverse.com Managing Editor Olly Ludwig visited with Bogle, they talked about the book, the state of indexing, his ongoing reservations with overly traded ETFs and the wisdom of adding corporate bonds to fixed-income allocations in this age of financial repression.
Ludwig: Reading the book, it seemed like an extension of the 1951 thesis you did at Princeton. It’s as if you’ve been saying the same thing through the years, but each time it’s a bit more trenchant, well organized and to the point.
Bogle: You’re very kind to say that. I guess the basic values and ideals are there. I’ve lived a long time between the thesis and the book, so I’ve had a lot of experience. And at a certain point in life, you start to get a little wisdom. So I think it’s maybe a little more impassioned now, and maybe a hair more sophisticated. But the basic value is and basic strategy has been really quite consistent throughout my long career.
Ludwig: Well it was certainly a pleasure to read. When I’m feeling dark, I think the financial world is full of mendacity and legalized theft. And then I encounter you and I think: “Hey, there is hope after all!”
In any case, there are some people who say that Rob Arnott in Newport Beach, Calif. is the second coming of John Bogle, and that this fundamental indexing thing is the next logical chapter. Do you have any opinions about that?
Bogle: Well, yes. His backtesting thing is wonderful. I never saw a backtest that wasn’t. Obviously, if you backtest and it doesn’t work, it’s never heard from again. And when after X number of tries you finally find one that works, you can brag about it. But I’m struck by the fact—I was just looking at this the other day—in a recent period looking at his returns to Sept. 1, 2012, his RAFI 1000 ETF (NYSEArca: PRF) is up 448, and our total stock market ETF (NYSEArca: VTI) is up 413. I think we can call that a tie.
But when you look at the risk involved, the standard deviation is a good 15 percent higher, at 22.8. We have a deviation of 19.8. So that’s higher risk for an indifferent improvement and reward.
I can’t quite get a grip on what the system is, but he made it, and I’m sure he’s doing as best he can. All these things are much harder when you go away from market weight. A company improves its dividend by 20 percent, and you’ve got to adjust. There are a lot of adjustments. And he probably runs a significantly higher turnover than we do.
Ludwig: It’s basically a fund with a small-cap and value tilt, isn’t it?
Bogle: That’s exactly what it is.
Ludwig: So you’re going to stick to your knitting in terms of market-cap weighting until the bitter end.
Bogle: Exactly, until the last dog dies. I want to say in both cases—cap-weighting and RAFI—because everything in this business is so nonsymmetrical, he can’t be a lot better and he can’t be a lot worse.