Practicing What They Preach at Vanguard

John Bogle is one of the most colorful, oft-quoted figures in the mutual fund business.

As founder and senior chairman of Vanguard Group, he for years has urged shareholders to invest in low-cost portfolios, preferably index funds, while diversifying among both the stock and bond markets. But does Bogle put his money where his mouth is?

To a large degree, yes.

“He’s certainly eating his own cooking,” said Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter in Brooklyn, N.Y. In a study of the investment holdings of Vanguard’s 10 directors, Wiener found that as of March 31, Bogle had $35.2 million spread among 36 Vanguard funds.

Wiener’s analysis also reveals Vanguard’s chairman and chief executive, John Brennan, as a person who practices what he preaches. Brennan had $11.4 million spread among 29 Vanguard funds.

Seven of Vanguard’s eight other directors had at least $1 million invested in the family and an average of 13 fund holdings. The low man on the totem pole in both categories was Bruce MacLaury, president emeritus of Brookings Institution, who after nine years as a director held $600,000 in just two portfolios.

These glimpses into the fund holdings of Bogle, Brennan and the eight other directors come as a result of proxy filings that Vanguard made this year.

The company wants to reorganize as a Delaware business trust to save on state taxes and make other changes that shareholders must approve. Directors normally don’t have to disclose their fund holdings--except when proxies are issued.

“In general, mutual funds don’t issue proxies unless they’re putting something of importance before shareholders,” Wiener said. “This is a unique opportunity to see how these directors are managing their own investments.”

All told, the 10 directors had $86.1 million in 35 Vanguard stock funds and 23 fixed-income portfolios as of the March 31 proxy date.

Of these, Vanguard Windsor, which is closed to new shareholders, was the most popular holding, with a combined $12.2-million stake. It was followed by $9.8 million in Municipal Money Market and $8.7 million in Municipal Limited-Term. Vanguard’s largest fund, its $60-billion Index Trust 500 Portfolio, was in fourth place with $3.5 million.

Yet one-third of Vanguard’s retail funds counted no directors as shareholders.

Among the omissions, Wiener said he was perplexed that no directors owned Vanguard Health Care, which he called the firm’s best performer. The fund has led the company’s performance charts for the last five years, yet Wiener worries that its assets have swelled so much that future results might be affected.

“It makes me wonder if anyone’s keeping an eye on whether this fund should be closed.”

International investing was another area that was avoided. Only one director, J. Lawrence Wilson, had more than 10% of his portfolio in foreign funds. Bogle, MacLaury and James Welch, the retired chairman of Nabisco Brands, had virtually nothing.

“I think a lot of these people take their leads from Bogle, who has said he doesn’t see a lot of value in international investing,” Wiener said.

Among the directors, the most popular foreign holding was Vanguard European index portfolio, at $1.9 million in combined holdings.

In light of Vanguard’s promotion of index funds and dominance in this area, Wiener is surprised that several directors had light holdings here. Only Bogle owned any bond index funds, and MacLaury had no index holdings at all.

“The issue is whether they’re eating their index cooking,” Wiener said. “The answer is only a little.”

Still, six directors, including Brennan and Bogle, had at least 25% of their Vanguard assets in index funds. Wilson, who’s chairman and chief executive at Rohm & Haas Co., led the list with two-thirds of his assets in the index arena.

In general, the directors’ holdings showed them to be a fairly conservative lot, which perhaps isn’t surprising considering that all but two are in their 60s. Overall, the managers held about 40% of their assets in bond and money market funds.

Still, it’s hard to draw many conclusions about the directors’ personal portfolio allocations because they were not required to reveal non-Vanguard investments.

“Bogle and Brennan claim to have substantially all of their money at Vanguard,” Wiener said. “But none of the others claim that.”

Bogle and Brennan aren’t commenting on Wiener’s report. But John Woerth, a Vanguard spokesman, cautioned that director investments in certain funds shouldn’t be viewed as endorsements, just as funds without director shareholders shouldn’t be viewed negatively.

“Some directors may not hold particular portfolios given their [state] residency, tax situation, investment objectives or risk tolerance,” he said.

While Vanguard’s directors in general appear to have aligned their interests with shareholders, Wiener thinks there’s room for improvement. In particular, he frets that one-third of Vanguard’s funds have no director shareholders.

“I think directors should be paid in shares of the funds they oversee,” Wiener said. “I also think directors and portfolio managers should be required to disclose their fund holdings at least twice a year.”

Russ Wiles is a mutual fund columnist for The Times and co-author of “How Mutual Funds Work,” published by Simon & Schuster. He can be reached at russ.wiles@pni.com.