Remembering Jack Bogle, colossus of mutual fund industry3 min read . Updated: 19 Jan 2019, 08:36 PM IST
- Vanguard Group founder Jack Bogle died on 16 January
- Cutting out the fund manager, he introduced index-based investing
Indian retail stock and bond investors may not have heard the name, but John C. Bogle (called Jack) impacted the way mutual funds are constructed, cost and sold all over the world. The founder of the $4.9 trillion Vanguard Group died on 16 January, a little over three months short of his 90th birthday. Bogle straddles the fund management world like a colossus, having turned an industry on its head more than 30 years ago by thinking of and acting in the interest of the retail investor. He did this by focusing on whittling down costs in two ways. One, to cut out the star fund manager and introduce index-based investing with wafer-thin costs. Two, to cut out the distributor and go “no-load"—where shares are sold without a commission or charge.
Born just before the onset of the Great Depression in the US, Bogle understood the importance of money early on. He was good at numbers. At Princeton University, his 1950-51 senior thesis of 140 pages titled ‘The Economic Role of the Investment Company’ became the bedrock of his life and career. The introduction to his thesis says, “The prime responsibility of mutual funds must always be their shareholders." And the conclusion says that mutual funds must “serve both individual and institutional investors…serve them in the most efficient, honest and economical way possible". His thesis urged funds to reduce sales charges and management fees and “make no claim to superiority over the market averages".
The paper got him his first job—with Wellington Management, a one-fund firm with $150 million in assets. A bid to raise assets under management and fund managers led Bogle and the firm into a merger they regretted, eventually resulting in Bogle getting fired as the chief executive in 1974.
But Bogle’s zeal for his ideal market was so strong that, a day later, he managed to convince the board to “mutualize" the funds. The company would be owned by the funds themselves and operated at cost in the interest of investors. He picked the name “Vanguard" for this firm from the flagship in Nelson’s fleet that defeated Napoleon Bonaparte. Now he ran what he called just one-third of the loaf, because fund management and distribution were not under his control. But it was only a matter of time before Vanguard became the whole loaf.
His argument was simple. Fund managers can’t do better than the average market return over the long term. The best way for an average investor is to buy the market index itself, of both bonds and stocks. Index investing costs a fraction of managed funds, leaving the surplus for the investor to take home.
To put this into practice, he fought with and then convinced his board at Vanguard, and launched the world’s first index fund on 30 December 1975—Vanguard 500 Index Fund. Investors were not pleased and the issue raised less than it aimed to. Instead of retreating, Bogle ran head on into battle and cut out the distributors and agents with his no-load funds. Rock-bottom fund management costs with zero sales charge changed the world of retail investing. It’s a deal that mutual funds across the world have since embraced, moving the index fund and exchange-traded fund (ETF) market in the world to over $5 trillion. What began 30 years ago has now resulted in the world’s first zero-cost fund in the US (not a Vanguard fund). India too has wafer-thin costs in ETFs and index funds at less than 10 basis points in annual expenses.
Finance, it is said, has no place for idealists. Good guys finish last in a profession where market jockeys celebrate each time they hit and run investors with high-cost junk. Bogle, by his sheer force of character and drive to manifest his ideals in one of the most cut-throat markets in the world, where regulators do not come to the aid of retail investors, will be remembered for what he achieved—giving the average working class person the route to safe, low-cost investing. We are all Bogleheads, as his many admirers and followers are known: we celebrate the win of good over bad as we remember the icon of mutual funds.