Bogle fires back at Hennessy in public smack-down

Vanguard founder claims Hennessy's funds underperform, in part, due to excessive fees; ‘short-term speculators'

Sep 17, 2010 @ 12:55 pm

By Jessica Toonkel

John Bogle, founder and former chief executive of The Vanguard Group Inc., has come out swinging in the latest round of a throw-down between himself and Neil Hennessy, president and chief executive of Hennessy Advisors Inc.

In an interview with InvestmentNews, Mr. Bogle took another shot at Mr. Hennessy, criticizing his firm's performance. “[Hennessy] is running an enormously profitable management company with inferior performance in these funds, in part because of the excessive fees he charges.”

He also criticized Hennessy Advisors' turnover ratio, which, according, to Morningstar Inc., is 108%. “They are short-term speculators and thus very tax-inefficient,” Mr. Bogle said.

The feud between Mr. Bogle and Mr. Hennessy commenced Aug. 27, when the Vanguard founder wrote an opinion piece for The Wall Street Journal. In it, he cited a Morningstar Inc. study showing that fund expenses are an accurate predictor of a fund's performance. (Read a recap of the rift)

In his piece, Mr. Bogle noted that fund costs rose to $42 billion, from $50 million, between 1960 and 1990 — an 800-fold increase — while equity fund assets grew to $5 trillion, from $10 billion, a 500-fold jump.

“Conclusion: The huge economies of scale available in managing other people's money have largely been arrogated by fund managers to their own benefit, rather than to the benefit of fund shareholders,” he wrote.

But in a Sept 13. letter to the editor of the Journal¸ Mr. Hennessy shot back. In his letter, the Hennessy boss said that Mr. Bogle should spend more time focusing on financial services reform and less time pointing the finger at mutual fund managers if he wants to address rising fund costs.

“Good fund managers often outperform low-cost index funds, and funds' performance is published net of fees, period,” Mr. Hennessy wrote. “I think that Mr. Bogle's time would be much better-spent working on solutions to address the financial-regulatory-reform act, which will certainly increase costs to every single mutual fund shareholder.”

But in his interview with InvestmentNews, Mr. Bogle said Mr. Hennessy shouldn't be one to talk about fund performance and expenses. He said that Hennessey Advisors' earnings were up 1,000% last quarter, while its funds have underperformed. For example, the firm's $236 million Cornerstone Growth Fund Ticker:(HFGX) has trailed its peers for the past four years, according to Morningstar, and has an expense ratio of 1.36% — which is high for a fund that size, Mr. Bogle said.

“It should be he who is without sin who casts the first stone,” Mr. Bogle said.

For his part, Mr. Hennessy said the debate isn't about Hennessy Advisors; it's about the industry as a whole. “If he hadn't used the word ‘arrogated' and with one broad stroke criminalized the entire [registered investment adviser] industry, I wouldn't have written a rebuttal,” Mr. Hennessy said. “And so the bottom line is, he wrote a piece, I wrote a rebuttal, and that's the end of the dialogue.”

Apparently, it's not.


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