The man who helped investors buy yachts

The Bogle Effect: How John Bogle and Vanguard turned Wall Street inside out and saved investors trillions

Author: Eric Balchunas

Publisher: Matt Holt

Pages: 336

Price: Rs 1,859

Jack Bogle (actual name John C Bogle) is popularly known as the father of index funds. In 1975, he created the first index fund to be sold to retail investors. Many regard the index fund to be among the most significant innovations in finance over the past 50 years. No less a person than Warren Buffett has said that if a statue were ever erected for a person who has done the most for American investors, the hands down choice would be Jack Bogle.

Eric Balchunas, senior analyst at Bloomberg Intelligence focused on Exchange Traded Funds (ETFs), and co-host of a podcast called Trillions, says Bogle’s impact is vastly under-rated. Remedying this lacuna was his motive for writing this book.

The author estimates that by launching low-cost index funds, Bogle has cumulatively saved American investors over $1 trillion. Money that would have been pocketed by Wall Street instead went to ordinary investors.

Bogle spent more than 40 years evangelising the American public to the creed of low-cost index funds, often in the face of hostility from the rest of the industry. Initially, active funds enjoyed a bigger market share. They paid generous commissions to brokers to hawk them. But their problem was that most of them were inconsistent in beating their benchmarks. Brokers sold them to investors based on recent performance. But that performance was no guarantee the fund would continue to beat its benchmark over the next 20-30 years. They were also expensive, with expense ratios of 2 per cent or more.  

What Bogle offered investors was low-cost funds that mimicked their indices. Over the long run, the majority of active funds in the US found it difficult to beat them.

Another unique element Bogle offered was the “mutual” structure of his company, Vanguard. Here, the funds own the company. And since investors own the funds, they are the ultimate owners of the company. Other mutual fund companies are owned either by private or public shareholders. The fund house’s management ends up serving two masters—the investors and the shareholders—whose interests are not aligned.

In Vanguard’s case, the owner and the investor are the same entity, and this changes the dynamics completely. Profits don’t go into buying yachts for either the owners or the management. Instead, they are used to lower the expense ratios of funds. Vanguard S&P 500 Fund’s expense ratio has declined from 0.43 per cent in 1976 to 3 basis points (0.03 per cent) in 2021.

Despite Vanguard’s runaway success, not one company has emulated its mutual structure. The reason is simple: Why would fund house promoters give away their gains to investors?

Despite having founded America’s largest fund house by US fund assets (BlackRock is number one overall), Bogle wasn’t ranked even among the top 1,000 people in the American financial industry in terms of personal wealth. Not surprisingly, many referred to him as Saint Jack.

The mutual structure, however, is the reason why rivals will find it hard to beat Vanguard.

Bogle and Vanguard have shaped America’s financial ecosystem in myriad ways. Rivals were forced to launch low-cost index funds and ETFs, while active funds had to lower their fees.

Bogle’s influence extended to the advisor community as well. Many started out as brokers who sold the funds their companies asked them to. But they were perturbed by the high fees and the tendency of active funds’ performance to falter with disconcerting regularity. In due course, many of them became registered investment advisors (RIAs), which requires them to adopt a fiduciary role towards clients. And they embraced low-cost index funds. Some of them have likened this to a religious conversion: Once they adopted a fund whose expense ratio was less than 10 basis points, there was no going back to those that charged 1-2 per cent.         

Bogle and Vanguard’s success in the US has implications for India. The latest S&P Indices Versus Active Funds (SPIVA) scorecard shows 67.6 per cent of active large-cap funds failed to beat the benchmark over the past 10 years. In the mid- and small-cap space, 56.1 per cent lagged behind.  

Even in India, smart do-it-yourself investors are figuring out that low-cost index funds held for a long time are a simple and easy way to accumulate wealth. The number of RIAs is rising here. Many have begun recommending low-cost index funds and ETFs, especially in the large-cap space.

Mr Balchunas has done a good job of capturing Bogle’s life story. Equally fascinating is his conclusion about the impact low-cost index funds and ETFs will have on the mutual fund industry. He believes over time the share of active funds will shrink, and so will the industry’s profits. Anyone keen to learn how Bogle’s index fund revolution is transforming the mutual fund landscape globally must read this book.