BusinessWeek Investor -- The Barker Portfolio
A Fund Company of His Very Own
John Bogle Jr., son of Vanguard's founder, is starting over with Bogle Investment Management. His first offering: a small-cap growth fund
Talk about great expectations. Since John Bogle Jr. suddenly left his post last winter as quant-in-chief at the Numeric Investors mutual-fund group, fundland's cognoscenti have been chat-chat-chattering away on Internet message boards about what Bogle would do next. It got so bad that one Morningstar.com poster asked, "Can anybody please coherently explain the fascination, nay, fetish, with the whereabouts and future plans of one Bogle Jr.?"
Well, there's obvious curiosity about the son of an industry legend, in this case Vanguard Group founder John Bogle, who is succeeding in Dad's world. But the real reason is even simpler: Bogle Jr. knows how to make money--especially in small stocks, where he crushed rivals with N/I Numeric Investors Micro Cap Fund (table). Now, such fund aficionados as Laguna Niguel, Calif., attorney Steve Dunn are itching to dump shares in the N/I fund and send the dough to Bogle. He even phoned Bogle at his Wellesley, Mass., home. "When is the new fund starting?" he wanted to know. "Who do I call?"
The answers are October, and 877-BOGLE-IM. I learned that and a lot more the other day after visiting suite 206 at 57 River St. in Wellesley, where Bogle Investment Management has just set up shop. There's not much to see: 2,200 square-feet of blue carpet, a black Dell 2300 PowerEdge server still sitting on the floor, three partners, and one anxious Bogle. "Can I give you the tour?" he asked me. "It'll take all of 15 seconds."A FALLING OUT. Three hours later, I had a good sense of where Bogle has been, and where he's headed this fall as he turns 40. At Numeric since 1990, Bogle fell out in February with its president, Langdon Wheeler, in a management clash. Bogle was left reeling. He didn't set a new course until April, when he met Keith Hartt, a PhD statistician and trader with six years in Fidelity Investments' quant group. What ensued was one of those Vulcan mind-melds out of Star Trek: Hartt soon quit Fidelity. The two spent all summer in Bogle's house honing models they hope will slay the market. "We want to make sure it's dead right," Bogle says. "We need performance right out of the blocks."
Along with a private hedge fund, they expect by Oct. 1 to begin running Bogle Small Cap Growth Fund, with a $10,000 minimum investment. Bogle also is in talks to run some portfolios, including a mid-cap growth fund, on behalf of two other fund companies--neither of them Vanguard, he notes. Eventually, he hopes also to offer a series of "tax-efficient" funds that minimize investors' tax bills. His goals: to run $100 million within one year, $250 million in three.
Should some of that be yours? Not yet, if your money is in a taxable account. Bogle sees the fund holding stocks on average eight months or less, so most gains, if any, would be taxed at high rates. But if you want part of your retirement or other tax-deferred savings in small growth stocks, the fund is worth a look.
From a pool of 1,100 domestic stocks with market values of $1.6 billion or less, Bogle aims to put 100 to 150 in the fund at any given time. His new computer model is built to rank them on dozens of quantitative criteria, including such "momentum" measures as how much a company's profit reports surprise Wall Street analysts.
That's common stuff these days. So Bogle hopes to get an edge by looking at stock trading of corporate insiders and changes in dividend policy that signal management's outlook on earnings. He also is applying statistics to the "quality," or reliability, of a company's profits and its financial strength, criteria that have long been popular with pencil-and-paper investors but not quants. Absent those checks, most computer-driven portfolios are vulnerable to profit blow-ups such as Sunbeam's or Cendant's. By contrast, Bogle is happy to override his computer's conclusions at any moment.
Will all this work? It's hardly riskless. Even if Bogle picks winners, small growth stocks have lagged since 1994 and figure to plunge in any market break. High interest rates or recession could be killers, too. Yet Bogle's new fund has two big things going for it. First, a plan to stay small and close at $150 million, which offers a huge leg up. More important, Bogle Jr. knows he's now all on his own: Those great expectations are his alone to fulfill, or not.
Questions? Comments? E-mail firstname.lastname@example.org or fax (407) 728-1711By Robert BarkerReturn to top