John Bogle Couldn’t Really Succeed Until He Got Fired
(Bloomberg Opinion) -- Describing John Bogle as the founder of the Vanguard Group, as has been done in most of the obituaries of the index-investing pioneer, is not incorrect. But it does seem somehow insufficient.
That’s because Vanguard was not so much founded in late 1974 as wrested from the grasp of Wellington Management Co., the Philadelphia mutual fund company that Bogle had joined out of college in 1951, had been leading as president since 1967 — and been fired from in January 1974. Those complicated origins explain a lot about the unique sort of investment juggernaut that Vanguard became.
In 1928, Wellington had started the first “balanced” mutual fund that held both bonds and stocks. That conservative approach helped it survive the 1929 crash and long bear market that followed, but as the stock market boomed in the 1950s and 1960s, it began to seem awfully stodgy. Bogle persuaded his bosses to launch the all-stock Windsor Fund in 1958, which worked out pretty well, and then in 1966 engineered a merger with the upstart Boston firm that managed the red-hot Ivest Fund. That didn’t work out. "It was certainly the dumbest move of my career," Bogle told me when I profiled him for Fortune in 2003. "I did something really stupid and paid a very steep price."
As markets turned south in the 1970s, Ivest collapsed, the other Wellington funds didn’t do too well, either, and Bogle’s relations with the Bostonians grew increasingly fraught. He owned 28 percent of Wellington’s shares. They had 40 percent and were able to muster a majority vote to oust him.
That would have been the end of the story, or at least the beginning of a very different story, but for the technicality that the mutual funds run by Wellington Management were controlled by independent boards formally answerable to the funds’ investors. This is the way all mutual funds are set up, but the boards hardly ever go against the wishes of the management companies that run the funds. Bogle was still chairman of the Wellington fund boards, though, and his fellow directors felt more loyalty to him than to the Bostonians. They weren’t quite ready to buy out Wellington, as Bogle initially proposed, but as he recalled in a speech decades later:
After eight months of laborious study and give-and-take, I was able to persuade the Fund directors to retain me in my posts and build a small staff to administer the funds’ accounting, shareholder record-keeping, and legal affairs. We formed a new corporation to handle these responsibilities, wholly-owned by the funds themselves and operating on an at-cost basis — a truly mutual structure, unique in the industry.
This corporation was the Vanguard Group Inc. It was to have no role in the two most important and lucrative aspects of the mutual fund business, distributing and managing the funds, but Bogle soon found ways around that. Vanguard began selling funds directly to investors on a no-load basis instead of distributing them through brokers and created an “unmanaged” fund that simply held the companies in the Standard & Poor’s 500 Index. “It was one of the great acts of disingenuous opportunism defined by the mind of man” is how Bogle described the chain of events.
It wasn’t entirely disingenuous: Bogle had been musing publicly for several years about converting Wellington into a true mutual, and he had concluded back in the 1951 Princeton senior thesis on mutual funds that had launched his career that “the funds can make no claim to superiority over the market averages.”
It was certainly opportunistic, though. Before being pushed out at Wellington, Bogle had been critical of the concept of an index fund, which was first floated in the pages of the Financial Analysts Journal in 1960 (Bogle wrote a pseudonymous rebuttal) and first put into practice for institutional investors by Wells Fargo in 1971 (which was the beginning of what is now BlackRock’s giant index investing business). If his career hadn’t been derailed, Bogle likely would have just kept doing what he had been doing. "If I were still running Wellington Management, it wouldn't be no-load, and I would probably be rich as Croesus," he once put it.
Instead, he became possibly the most important and influential financial-sector figure of the past half-century-plus. As my fellow Bloomberg Opinion columnist Nir Kaissar writes, forgoing billionairedom (he ended up with a net worth estimated at $80 million) helped Bogle create hundreds of billions and maybe trillions of value for Vanguard’s customers. But it wasn’t actually his choice. Having the path of great riches closed off to him left open the ultimately more satisfying and disruptive course of putting the interests of Vanguard’s investors first. Being a hard-charging, hypercompetitive businessman who hadn’t really intended to become a do-gooder helped him to succeed on that course. It was a unique and potent combination.
It also led to one of the most successful post-career careers that I’ve ever observed. The first time I talked to Bogle, in 2002, he’d been off Vanguard’s board for three years (forced out by a mandatory retirement age of 70), was an embattled gadfly estranged from the firm’s current management and the mutual fund industry in general, and could come across as a bit of a blowhard. I was working on an article about behavioral economists and their recommendations for investors, and his first words after I’d explained myself a little were, “They’re telling you stuff that a non-behavioral economist like Bogle has been telling people for 35 years.”
That article ended up growing into a book with a whole chapter on Bogle, and as such signs of appreciation for his accomplishments multiplied, spurred in part by indexing’s continuing market-share gains, the tone of his crusading changed a little. Lots of people mellow as they grow older, but Bogle also seemed to grow more intellectually curious and open-minded, which is rare.
When I last spoke to him, over the summer, it was in part to ask about the new line of academic research purporting to show that increased concentration of ownership by indexers Vanguard, BlackRock and State Street was leading to less competitive corporate behavior. The 89-year-old Bogle had read all of the research, it turned out, and had some criticisms. But he also allowed that indexing’s rise couldn’t continue unabated forever. “Think of a single firm possibly owning 50 percent of every stock in America,” he said. “I can’t tell you why it’s not going to happen, but it’s not going to happen.” Late last year he spelled out his concerns and offered some possible solutions in a new book and a Wall Street Journal op-ed. It was, in a way, the perfect sign-off.
The book also contains a bunch of entertaining details about the 1974 Wellington/Vanguard power struggle.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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