Value Investing

“Uneasy Lies The Head That Wears A Crown”: A Conversation With Jack Bogle

On January 8, 2018, I interviewed John C. (Jack) Bogle, the founder of Vanguard, the largest manager of U.S. index funds and the second largest investment management organization in the world. Bogle, born in 1929, founded Vanguard in 1974 and launched the first index mutual fund, designed to track the S&P 500, in 1975. He served as chairman and CEO of Vanguard until 1996 and senior chairman until 2000. He now runs the Bogle Financial Markets Research Center and remains actively engaged in the investment industry.

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Jack Bogle’s early years and the first index fund

Let’s begin at the beginning, not of your life but of the index fund revolution, which I date to Bill Sharpe’s 1964 article on the Capital Asset Pricing Model. A few years after that, you began to set up a firm that had an index fund at its core. What were you thinking? What evidence did you have that anybody would want it, and what were the steps by which you came to where you are now?

I talked about the idea of an index fund in my senior thesis at Princeton in 1951. The idea had always intrigued me, but I had never thought about following up much with it. But I did point out, at that time, that mutual funds can make no claim to superiority over the market averages. If my involvement with index funds began anywhere, it began there.

When did you begin to implement the idea?

A couple of decades after Princeton, there I was in mid-career at Wellington Management with the index fund idea going nowhere in an industry that doesn’t innovate very much. After leaving Wellington, I founded Vanguard in 1974. Vanguard finally succeeded, after a long struggle, to make its funds independent of Wellington Management Company, which was at that time the manager of its funds. The key to launching an index fund was in the Vanguard structure. We created a novel structure in which the fund manager would be owned by its fund shareholders, rather than by insiders or outside stockholders. Because Vanguard’s interests are closely aligned with those of our fund shareholders, we were interested in seeking fee reductions rather than higher fees and higher revenues. The whole idea was to reduce fees, not maintain or increase them. In those early years, we had 205 fee reductions.

We also made the fee reductions prospective, so they would only applied to assets not gathered yet. Therefore, the negotiations with Wellington Management Company were not very difficult. We would say, “let’s reduce the fee to 15 basis points on fund assets over $10 billion.” When you do that on a fund that manages $500 million, no one is paying much attention.

The idea of a fee reduction led, all of a sudden, to the idea of a fund that pays no fees whatsoever. This is something you want to do if you have a mutual company. As with a crime, you need both the opportunity and the motive; everybody had the opportunity, but we alone had the motive to start what is, in fact, the first index mutual fund.

At that time, of course, there was a lot of activity surrounding recent academic advances, including the idea of an index fund. We are all familiar with the work that was being done at Wells Fargo on behalf of the Samsonite pension plan.

What was the dynamic between you and the Wells Fargo index or quantitative group led by John McQuown?

I think that the Wells Fargo effort failed at the beginning because they picked an equally-weighted index that wasn’t manageable. The execution was a nightmare. After we had started our fund, they moved over to the S&P 500, which is, of course, capitalization-weighted. In a very important way, we are even older than they are.

Since then, Samsonite has gone through bankruptcy. God knows whether the pension plan even exists any more; I do not. But that little germ of an idea back in 1974 turned into the first index fund, which was approved by the Vanguard board in September 1975.

Why you? When an idea is “in the wind” like that, it is there for the taking by whoever is most enterprising, by what we now call the first mover. How did you come to be that person?

I’d experienced the worst part of investment management during my career. I was on the Wellington Fund Investment Committee. I did a merger with a “go-go” firm called Thorndike, Doran, Paine, and Lewis, which managed the Ivest Fund, among others. They were abject failures. To make matters worse, Wellington brought in a guy named Walter Cabot who eventually became treasurer of Harvard and president of Harvard Management Company, to run the Wellington fund. Within 10 years he ran it into the ground. The fund managed $1.9 billion when he started, and $685 million when he got through, the worst record of any balanced fund in the business.

Read the full article here by Laurence B. Siegel, Advisor Perspective