Scott Cooley: So, you talked a little bit about reversion of the mean and certainly, it's hard for those managers to keep performing at a high level. There are also some more value-oriented strategies that rely on reversion to the mean. Do you think they are a good substitute for indexing in any way?
John C. Bogle: Well, sometimes value wins and sometimes growth wins. And we have over in the U.S., you are probably very familiar with it over in Europe too, we have smart beta and these are funds that are going to be smarter than everybody else. I'm not sure exactly where beta comes in and nobody else seems to be. But in any event, they are supposed to go into certain factors. It might be value; it might be small cap; it might be momentum; it might be two or three other things. And by focusing on that they will outsmart, if you will, the market index.
There are only two funds that have been doing that for any period of time; one is Rob Arnott's fund, I think it's called RAFI 1000 and the other is Jeremy Siegel's fund called WisdomTree and they are weighted by corporate fundamentals in the Arnott case and by corporate dividends, the amount of dividends is the basis for the indexing, and they have had respectively, 10 years and 9 years to prove themselves.
They have not done so. It's on the record. The RAFI 1000 has done a little bit better than the S&P but at a higher risk and therefore, as it turns out in the data, has a lower Sharpe Ratio, a lower risk-adjusted return than the S&P 500. The WisdomTree is just the opposite. It has a lower return but a lower risk, but again a lower Sharpe Ratio. So the index has provided a better risk-adjusted return than either of those two forays into "smart beta."
And as Bill Sharpe says, it's an interesting point, think about it this way. If smart beta is winning, dumb beta is losing by the exact same amount and there is no way around this in the marketplace. If strategy A works for investor A then strategy B will not work for investor B. Not everybody can win. We are not here – as they say, Scott, we're unlike Wobegon, where all the children are above average. We all are average before cost and that's the methodology of the index fund. It gives you the average market return and takes 5 basis points out and it is the winning strategy unequivocally.
