Speculation Grows on Rift Between Key Vanguard Group Executives

Vanguard Group, the nation’s second-largest mutual fund company, suddenly is facing mounting speculation about a clash in its executive suite.

Published comments by Vanguard’s founder and senior chairman, John C. Bogle Sr., suggest rising tension between Bogle and his handpicked successor, Chairman John J. Brennan.

Although any rift would have no effect on the day-to-day operations of Vanguard’s many funds, it may focus attention on Vanguard’s growth strategies as it seeks to maintain its unique character.

Differences between Bogle, 70, and Brennan, 45, may be coming to a head as the company deals with whether Bogle should retire.

Vanguard said Thursday that it will impose on Bogle its mandatory retirement policy, which requires that all board members step down at the end of the year in which they turn 70. Bogle turned 70 in May.

But Bogle, a legend in the fund industry, has been increasingly vocal about not being forced to leave the now-$500-billion-asset company he started in 1975.

Vanguard spokesman John Woerth stressed that “Vanguard’s board is not asking Jack Bogle to retire.� But Woerth said the company intends to adhere to its long-standing retirement rule.

Bogle, however, on Thursday told TheStreet.com, a financial Internet site, that he has “mixed emotions� about being subject to the retirement rule. “There is certainly an argument that the creator of a company deserves a tad of extra consideration,� he said.

Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter, said that “if the [Vanguard] board meets in September and they don’t change the policy, I think it’s like a passive-aggressive way of them forcing him out.�

Bogle handed the chief executive reins to Brennan in 1996. Brennan now also serves as chairman of Investment Company Institute, the fund industry’s chief trade group.

As such, Brennan is the designated defender of the $6-trillion mutual fund industry. Bogle, meanwhile, has been openly critical of the industry as a whole, attacking it on issues such as high fees.

In his new book, “Common Sense on Mutual Funds,� Bogle blasts fund companies for caring more about marketing and distribution issues than the actual trusteeship of investors’ money.

Analysts say Brennan continues to run Vanguard much as Bogle did. Vanguard continues to be the industry’s low-cost leader.

However, some think that one potential point of conflict between Brennan and Bogle may be the company’s decision last year to expand its discount brokerage services, a unit that was launched in 1983 when Bogle was CEO.

In 1995, facing rising competition, the unit created a fund “supermarket� that made available 400 no-load funds from a variety of fund companies, as a one-stop resource for Vanguard shareholders. However, investors had to pay a fee to buy or sell.

Last October, Vanguard added 800 additional funds that could be bought without fees.

Bogle has long been critical of no-fee fund supermarkets because he thinks they encourage investors to trade too often.

In an upcoming cover story in Institutional Investor magazine, Bogle defends Vanguard’s supermarket. “There are supermarkets,� he said, “and there are supermarkets.� Vanguard’s, for example, imposes a fee on short-term trades.

But in the same story, although Bogle doesn’t openly criticize Brennan’s management, he said that he and Brennan “don’t talk much anymore. . . . Jack isn’t in his office as much as he used to be. He’s busy with his industry things.�

Brennan, who couldn’t be reached for comment on Thursday, may find it politically difficult to bend Vanguard’s retirement rules even if he wanted to.

An ICI advisory committee recently came out with “best practices� guidelines for fund boards in which it recommends formal policies on retirement of directors.