Jack Bogle, the founder of Vanguard, was most well-known for popularizing three principles: 1) on the whole, funds keep with the indexes until their costs are paid, then they lag behind; 2) given the unpredictability of fund returns, don’t bother trying to pick winners; and 3) long-term success is more likely due to lower costs than managers’ skill. In an article in Morningstar, John Rekenthaler tests those claims using factor models, which try to determine how much trends—i.e. factors—impact investments.

Rekenthaler examined all U.S. diversified equity funds for two 5-year periods, from 2013 through 2017 and 2018 through 2022, using Fama-French’s 3-factor model. That model takes into account how much each fund is exposed to the U.S. stock market, how big the companies are, and whether the investing style is growth or value. Given that professional investors now make up 80% of the trading volume in the stock market, with portfolio managers in essence competing against each other, the model backed up Bogle’s first claim, that investing is basically a zero-sum game. In the first 5-year period, the model produced a “net alpha” of negative 107 basis points which, after costs are added back, brings a “gross alpha” figure of 16 basis points. Bogle, on this point, was right: U.S. equity funds keep pace with their indexes before expenses, and then fall far behind after those costs are paid, the article contends.

Bogle’s second and third principles, that expenses are a better predictor of future net returns than manager skill, is also backed up by the model used by Rekenthaler. Expense ratios offered a clearer forecast than sorting by gross alphas and were better able to identify above-average funds. And while they were unable to predict future winners, they were likelier to avoid market losers—a valuable insight in and of itself, Rekenthaler maintains.