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Brendan McDermid | Reuters
Screens display a tribute to Jack Bogle, founder and retired CEO of The Vanguard Group, on the floor of the New York Stock Exchange (NYSE) in New York, January 17, 2019.
In that same 1997 paper, Bogle outlined the essential theory of why the high fees charged by active managers were the enemy of long-term investing. “Investors as a group must underperform the market, because the costs of participation — largely operating expenses, advisory fees, and portfolio transaction costs — constitute a direct deduction from the market’s return,” he wrote. “Unlike actively managed funds, an index fund pays no advisory fees and limits portfolio turnover, thus holding these costs to minimal levels. And therein lies its advantage. That, essentially, is all you need to know to understand why index funds must provide superior long-term returns.”
Despite his love for indexing, Bogle was never against active management. From the outset, Vanguard had many actively managed funds, including Vanguard Health Care, run for 30 years by legendary investor Ed Owens.
But even his actively managed funds were cheaper than those of competitors. It was a double whammy: Vanguard attracted passive investors who simply wanted to invest with the markets, but at a lower cost, and it attracted active investors who were seeking alpha but also wanted in at a lower cost.
Bogle retired as Vanguard’s chairman and CEO in 1996 and its senior chairman in 2000. He spent much of his time after that as president of the Bogle Financial Markets Research Center, writing books and spreading the gospel of low-cost investing.
His insights, however, were not always perfect. He clashed with John Brennan, who served as Bogle’s successor as CEO from 1996 to 2008, over the rapid growth of exchange-traded funds, or ETFs, which Bogle never warmed to because he felt it encouraged too much trading and discouraged long-term investing.
Fortunately, Brennan and his successors went full-steam into ETFs, and as a result Vanguard pulled past its rival Fidelity and attracted an ocean of new investments as passive investing surged after the Great Recession.
From those humble beginnings in 1975, Vanguard now has 20 million investors in about 170 countries and manages over $5 trillion in assets.
All this stemmed from a simple insight, again expressed in that 1997 paper: “Investors as a group cannot outperform the market, because they are the market.”
Thank you, Jack Bogle.