Pimco executives need only look at the firm's own performance if they want a lesson in the perils of active management, Vanguard founder Jack Bogle said.
In the latest salvo of a surprisingly public debate between two of the biggest names in fund management, Bogle said the underperformance of Pimco's flagship Total Return mutual fund provides a timely reminder that for most investors, index funds are the way to go.
Pimco's $201.6 billion TR—the largest bond fund in the world—has lagged its benchmark for three of the past four years and has lost about 30 percent of its assets under management over the past 16 months or so, according to Morningstar. The firm has, however, beaten the Barclays U.S. bond benchmark on a three-, five-, 10- and 15-year basis.
"They all peak at different times. They peak and they go down," Bogle, speaking about individual active-fund performance, said in a CNBC.com interview. "Pimco has been pretty good, but they also have reverted to the mean."
Bogle spoke a few days after Pimco's James Moore issued a report titled, "Sorry, Mr. Bogle, But I Respectfully Disagree. Strongly." That was in response to unspecified comments Bogle reportedly had made disparaging active management not only for equity—stock-centered—funds but also for bonds.
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In his commentary, Moore insisted that active management was particularly important in fixed income, where investors often have different goals and the playing field has different dynamics than in equity investing. The critical passage, which entailed five ways bond investors can benefit from active management:
The variety of investor objectives other than maximizing total return; the mechanics of bond index construction; the importance of the new issue market for bonds; the predominance of over-the-counter transactions; and the highly skewed returns on individual bonds versus stocks.
(Read the full text here.)
Even in that rejoinder, though, Moore, in arguing that active management has benefits, said strong active managers aren't exactly a dime a dozen:
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The key question for investors is, "Do I have strong reason to believe my active managers will add value in excess of their fees?" I would not argue that all do or even that a majority do, but those managers who understand and exploit the five reasons I list, plus a host of others, stand a very good chance.
That's not a chance Bogle fees good about taking.
"If you want to stand a good chance, go to Las Vegas or something," he said. "If you bet on red or black, you stand a superb chance of winning. It just happens to be below 50 percent."
Pimco officials did not respond to a request for further comment beyond Moore's report.
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As for those five reasons Moore cited, Bogle agreed with a few.
Investors do have objectives other than total return, and those who do could benefit from active management. However, those who do favor total return are better off in an index, Bogle said. He also conceded the "new issue" points but said he doesn't think that's a factor in performance, while the issue of over-the-counter trading is eliminated with passive management, which trades very little. Finally, he said the issue with skewed returns is very simple with index funds: You get what the index returns, minus a fee that is much smaller than what an active manager would charge for, on balance, a lower return.
"He did make some good points. I'm trying to be fair," Bogle said. "There's some truth, but not enough to verify the basic thesis. The job is to beat your neighbor, your neighbor being the other holders of bonds. (With index funds) that you will do."
