What's Holding Back Fund Flows?
Jack Bogle thinks the slowdown in U.S. equity fund flows could be caused by indexing having less room to grow.
Note: This video is part three of nine of an interview between Morningstar's Christine Benz and Jack Bogle, founder of Vanguard, at the 2018 Bogleheads conference. Watch the other segments here.
Christine Benz: When we look at fund flows in contrast with a decade ago, we see a little bit of a contrarian tendency with investors buying bonds and international equity at a time when the U.S. equity market has performed very well.
What do you make of that? Do you think that there's something fundamental underpinning that that could be lasting?
John C. Bogle: That's really a good question, and I don't think any of us know the answer. The reality is that this year, as compared to the boom in previous years, this year cash flows in the mutual funds are down pretty close to 50%. It's a large amount. At least, that's through August compared to the first eight months of last year. I don't see any reason it will not continue to do that, but numbers are funny. They can surprise you.
Let's assume that fund sales are off, net cash flow is off 33%; why is that? Well, the mutual fund business has been driven by indexing, and indexing can only be driven so far. It's now almost 50% of the assets of the equity fund part of the business--50% is an awful lot, up from maybe 5% in 1989 or '90, so it's grown very rapidly. It may just be that people have filled up their portfolio with index funds that don't care to add any.
It's not known to me. I don't see the daily figures at Vanguard or the monthly figures. I could give you a better handle if I did. Maybe it's the disruption in everybody's thought process by all the chaos we have in Washington, D.C.; I don't know about that, but it's hard to make people feel better. Although on the other hand, the administration has given, I guess given in quotes, this tax bill and created billions and billions and billions, I think the number's something like $40 billion, for corporations. While if you look at the full schedule, actually increased taxes for individuals. I find that remarkably bad economics. I won't talk here about whether it's bad politics or not.