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John Bogle Jr. Wears Family Ties to Work

July 14, 1996|RUSS WILES | Russ Wiles, a financial writer for the Arizona Republic, specializes in mutual funds

John Bogle Jr. is living proof that apples do not fall far from trees.

He's the son of John Bogle, founder and chairman of the giant Vanguard Group of Valley Forge, Pa. Unlike the offspring of bigwigs at several rival mutual fund companies, John Jr., 36, didn't follow directly in his father's footsteps. He began his career in engineering, then switched to banking after contemplating still other choices.

"As a kid, I always thought I would start a bicycle-repair shop," he confesses.

Competitors may wish he had.

The younger Bogle has landed in a management position at his own fund company, after having built a reputation as a skillful small-stock investor.

Bogle is a partner at Numeric Investors, a new fund group in Cambridge, Mass., where he runs the company's three nascent stock portfolios. At the end of June, he stepped down as manager of the Quantitative Numeric Fund, operated by the Quantitative Advisors group.

From that fund's debut in August 1992 through June of this year, Bogle guided Quantitative Numeric to a cumulative gain of roughly 133%, good enough to beat the small-stock Russell 2,000 index in 1993, '94 and '95.

His three new Numeric funds--Growth, Micro Cap and Growth & Income--debuted in late May at $12 a share and have attracted about $9 million. More than half that amount is in Numeric Growth, which most closely resembles Quantitative Numeric.

The new funds will not be listed in newspaper tables until they accumulate more assets--$25 million to $35 million is the usual range of the smallest funds in newspapers. But investors can obtain daily prices by calling Numeric at (800) 686-3742. Minimum investments are $3,000 for regular accounts and $1,000 for individual retirement accounts.

The three new Numeric funds could fare better than the original Quantitative Numeric portfolio because their costs are lower. Their annual expenses will be capped at 1% each. Expenses for Quantitative Numeric last year ran 1.8%.

"We weren't happy with the expenses charged on Quantitative Numeric and with the fact that there was a 12b-1 fee on a fund that was closed to new shareholders," Bogle says in explaining why his firm ended its money management ties to the Quantitative family.

So-called 12b-1 fees are shareholder-borne marketing expenses designed to attract new investors, so maintaining this type of charge on a fund that was no longer accepting cash didn't make sense, he says.

Quantitative Numeric stopped taking money from new shareholders as a way to keep a big cash influx from disturbing its returns. Bogle vows to do the same with his new portfolios when they reach $100 million to $200 million, depending on the fund.

Cost consciousness is a trademark of the senior Bogle, who built Vanguard into the low-cost leader among fund families. Vanguard ranks as the No. 2 fund family behind Fidelity Investments of Boston.

But in other respects, John Jr.'s investment approach is quite different.

The three portfolios he manages are quantitative, or "quant," funds, so named because they rely on computer analyses to identify attractive stocks.

The younger Bogle utilizes two complementary approaches to pick stocks. One is a fairly standard means of identifying undervalued companies by using a computer to scan for bargain characteristics.

The second, and more interesting, strategy attempts to identify stocks that are in the process of having their earnings forecasts upgraded or downgraded by professional analysts.

"When analysts revise their earnings estimates for a company, they tend to do so in small increments rather than all at once," Bogle explains.

This often results in a trend of upward profit revisions for some companies and downward revisions for others, creating buy and sell candidates for Bogle.

"It's often difficult to evaluate quant managers because there's a black-box element to their management styles," says Alice Lowenstein, associate editor of Morningstar Mutual Funds, a Chicago-based publication that accorded Bogle's Quantitative Numeric Fund a top five-star rating.

"But he has put together a system that functions very well, with a steady performance record and different types of stocks included," she says.

The upshot of John Jr.'s quant approach is that it contradicts the so-called efficient-market hypothesis, which states that it's futile to research companies in the hopes of finding bargains, because stocks already sell for their true worth. This idea is the underpinning for index mutual funds, which the senior Bogle and Vanguard have made famous.

"We believe there are inefficiencies and pricing anomalies that can be exploited," says the younger Bogle.

Now starts phase 2 of his efforts to prove his case.

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