The news of the passing of legendary investor John ‘Jack’ Bogle nearly reduced me to tears. I never met St Jack, as he was fondly known, but he has had an immense impact on my life and career. I know many advisers will feel the same.
Such is the impact of Bogle on my own family finance that, as soon as our twin daughters were born few months ago, I set them up with Vanguard accounts within weeks.
But a lot of what we do at FinalytiQ derives from Jack’s ideas and life’s work.
The Vanguard effect
Investors, both large and small, owe this man an immense debt. It is estimated Vanguard has saved investors $175 billion (£136 billion) in fees since it was founded in 1974. This is based on the historical difference between the asset-weighted average expense ratio of an active mutual fund versus that of a Vanguard fund. That is not counting the fact that in every sector where Vanguard has a fund, rivals are often forced to lower their fees, a phenomenon we have come to know as The Vanguard Effect.
This means you do not have to have owned a Vanguard fund to have benefited from Bogle. He was a thorn in the flesh of asset managers, and left investors everywhere better off.
The world's most famous investor, Warren Buffett, summed this up nicely when he said: ‘Jack did more for American investors as a whole than any individual I’ve known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount.’
Bogle started the first index fund in 1975 in a last ditch attempt to save his own career, after he had been fired for presiding over a failed merger at Wellington. Here is how he told the story:
‘It all happened so quickly. On 23 January 1974, the board of directors of Wellington Management Company (WMC) met and fired me as the firm’s chairman and chief executive, ending my 23-year career there with a bang.
‘The very next day, the board of directors of the Wellington funds, largely unaffiliated with WMC, met in New York. At the meeting, as chairman of each of the mutual funds, I proposed that we declare our independence from WMC, mutualise our funds, elect our own officers and staff, and empower them to operate the funds on an at-cost basis. In an industry where the primacy of the management company had never been challenged, such a step would be without precedent.
‘So the battle was joined. It was long and hard. But finally, on 20 August 1974, after seven months of heated debate, the fund directors unanimously agreed to form a new subsidiary, wholly owned by the mutual funds. The new firm would administer the funds’ affairs, but would be precluded from providing either investment advisory services or marketing and distribution services.
‘I recommended that the new firm be named Vanguard, and the board – reluctantly, as I recall – approved it.’
And so Vanguard was born and the rest is history.
Against the grain
The genius of this man was not just in creating the first index funds or the business that is Vanguard. It is the mutual structure of Vanguard, which ensures the interest of the investor is fully aligned with that of the manager. That model remains an exception nearly 50 years later.
When Bogle launched Vanguard, Fidelity’s chief executive at the time, Ned Johnson, was asked what he thought of the idea of index funds. He replied: ‘I can’t believe the great mass of investors are going to be satisfied with just receiving average returns.’
He could not have been more wrong. Index funds took off and Bogle’s folly became an existential threat to the entire active management industry.
Bogle went against the grain of conventional wisdom. He broke all the rules and then some.
We have lost a legend. We may not see his like for many generations to come.
This article was first published on the FinalytiQ blog.
Abraham Okusanya is director of FinalytiQ