Jack Bogle: A painful thorn in Boston’s side
Jack Bogle was an investment industry legend. In Boston, he was also a legendary pain in the butt.
Bogle, who died Wednesday at the age of 89, founded Vanguard Group in 1975 and proceeded — slowly at first, then like a juggernaut in the past two decades — to undermine the very premise upon which much of Boston’s fund industry was built: that professional stock-pickers are worth the fees they charge investors for managing their money in mutual funds.
At Vanguard, which is headquartered in a small town about 30 miles west of Philadelphia, Bogle created the first fund tied to a stock index for individual investors. Opened in 1976, the Vanguard Index Trust (now the Vanguard 500 Index Fund) was designed to match as closely as possible the performance of the Standard & Poor’s 500 index, a benchmark for the biggest US stocks.
The goal was simple but anathema to most of the investment world: Instead of paying fat fees to high-priced managers to research and select stocks, Vanguard customers were offered low-cost funds that mirror various baskets for stocks (and later bonds).
“He gave the industry a new way of thinking that was considered complete heresy at the time,” said John Casey, former chairman of Casey Quirk, a management consulting firm that caters to the asset management industry. Most people at fund companies “were dismissive of anything that didn’t particularly add value. But he was focused on building a business that had never been built before,” he said.
There would be no picking of winners and losers at Vanguard. The investor in its passively managed funds would ride the market up (mainly) and down (sometimes precipitously). And there would be no star managers like Peter Lynch at Fidelity Investments or Bill Miller at Legg Mason to attract investors. But that was fine by Bogle because he believed that no matter how smart, no manager could beat the market consistently over a long period of time.
“My ideas are very simple,” he told The New York Times in 2012. “In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”
Active fund managers in Boston and the rest of the industry scoffed at Vanguard as it rolled out index fund after index fund and (now numbering 190 in the United States and another 220 overseas). In part, they sincerely believed that they could deliver better results than following the market. But they also recognized that Bogle’s relentless focus on lowering the costs of running funds — which allowed him to charge smaller fees — had enormous implications for the profits active management made possible.
Vanguard got off to a slow start, with mostly sophisticated investors buying into the power of lower fees to bolster returns. But over time, mainstream investors warmed to the idea of index funds and their close cousins, index-based exchange-traded funds (ETFs), especially after the bear markets of 2000-2002 and 2008-2009, when many active managers lost more than market averages.
While some managers were charging asset management fees of 2 percent or more even when they lagged their benchmarks, Vanguard was cutting its fees, taking them down by almost two-thirds over the past two decades to an average of 0.11 percent.
That triggered a price war that has eaten into profits at active and passive fund managers alike. Boston-based Fidelity eventually got into index funds and ETFs, after holding out a long time under then-chairman Ned Johnson, and is seeing good inflows. In August the company even launched two no-fee funds.
But Vanguard’s unique structure gives it an edge on fees: It is owned by its fund investors (much like policy holders own mutual insurance companies), not private shareholders.
“Jack was always a tough competitor of ours and kept us on our toes, and for that I am grateful,” Abby Johnson, chairman of Fidelity, said in a statement to the Globe, echoing a view shared by other local firms.
“While his focus on index investing helped build significant adoption of passively managed strategies in the industry, I believe his views challenged active managers to be better at what they do,” Andy Arnott, CEO of John Hancock Investments, said in a statement. “He will have a lasting impact on the way investors build portfolios for years to come.”
Competition was good for Vanguard, too. It is the second-largest fund manager in the world, with about $5 trillion under management. Fidelity has about $2.7 trillion, while New York-based BlackRock, a big proponent of indexing, tops the list with $6.3 trillion.
There are still more assets in actively run funds in ($10.4 trillion) than in passive funds ($6.58 trillion), according to US data from industry tracker Morningstar. But the momentum is clearly with indexers: Last year, passive funds brought in a net $458 billion compared with net outflows of $303.4 billion at active funds.
Nevertheless, some fund companies remain true believers in the merits of active investing. Putnam Investments in Boston is one of them.
“For active managers to justify their being, they have to add a premium to the benchmark,” said Bob Reynolds, Putnam’s chief executive, who notes that the percentage of active managers outperforming their benchmarks has increased to 45 percent last year. “That’s still not high enough. . . . but I think you are starting to see a change there. It’s very cyclical.”
Reynolds, who was vice chairman at Fidelity before jumping to Putnam, says his firm — which only sells active funds — had net inflows last year.
Still, he has nothing but the highest respect for Bogle.
“He’s on Mount Rushmore,” he said. “And I’d add Ned Johnson right there next to him or ahead of him for all the innovations he brought to the market. They are the fathers of the fund industry.”
Yes, Boston was once king of the fund game. Now we have to share the crown.