In Memoriam: John C. Bogle

Abstract

Stephen J. Brown, executive editor of the Financial Analysts Journal, reflects on the life and work of industry leader John C. Bogle.

No person in the investment management community could be said to more fully embrace the practical value of ideas than John Bogle. In his 1975 presentation to the Vanguard board, he cited the writings of Paul Samuelson to support the revolutionary idea of an unmanaged stock index fund (Bogle 2016). Indeed, it is interesting to trace the evolution of his ideas on this subject through the pages of the Financial Analysts Journal.

It may surprise many readers to learn that in his first publication in the pages of the Financial Analysts Journal, under the pen name of John B. Armstrong (1960), Jack argued for the superiority of actively managed mutual funds over unmanaged portfolio-matching established indexes, contrary to ideas that were percolating at the University of Chicago at that time. This paper won an Honorable Mention for the Graham & Dodd Award that year. He revisited the issue of fund performance (under his own name) in Bogle (1970), in which he argued that outperformance could be the result of management being better than average at market risk or of taking higher risk with average management. While consistent with his later views on the role of passive management, he did not advocate passive management at that time. He could hardly do so, because he was president of Wellington Management Company, which was (and is) an actively managed fund company, a firm he was affiliated with for 23 years, until he left to set up Vanguard in 1974. Indeed, he attributed the fact that the NYSE Index periodically outperformed managed funds to the fact that those funds had different risk exposure, rather than being worse than average at market risk. Five years after the introduction of the Vanguard 500 Index Fund, he wrote a paper (Bogle and Twardowski 1980) in the Financial Analysts Journal that did not address the active versus passive debate but, rather, emphasized that the historical record of performance showed that institutional funds with professional management failed to do better than individual investors relying on mutual funds.

My own personal contact with Jack occurred in 2016 in relation to his article published in that year (Bogle 2016). He reflected on the astounding growth of the index fund industry in the 40 years since its inception. I remember the conversation well. Jack has always been a personal hero of mine, and it took some courage to challenge him on his negative views on the exchange-traded fund (ETF) industry. After all, was not this development a natural outgrowth of his 1975 epiphany, a more efficient delivery of index returns to retail and institutional investors? Jack was very patient with me. He allowed that ETFs might be an efficient investment for conservative buy-and-hold investors who need to manage their portfolios for tax reasons and to fund withdrawals from their investment accounts. However, in his view, most ETF transactions were for speculative rather than investment purposes. This important distinction is made very clear in Bogle (2016).

After this conversation, I came to reassess his intellectual contribution. I understood at that moment the essential continuity of this thinking, from his undergraduate thesis through his 1970 article in the Financial Analysts Journal to his most recent publications. His advocacy of the index fund concept was not at its heart an issue of any performance advantage obtained through these funds, although history would subsequently show that these funds represent a competitive challenge to actively managed funds. Rather, it was a matter of the fund’s fiduciary responsibility to reduce the costs of allowing individuals to own stocks as long-term investments. He strongly believed it was more appropriate for small investors to hold stocks for the long term than to speculate—or, in his words, to own stocks rather than merely rent them (Bogle 2006).

At its heart, his initial rejection of index funds in 1960 stemmed from his concern about the costs of indexation—the trading necessary to replicate the fixed-weight Dow Jones Industrial Average and the necessity to adjust for periodic reconstitution. Trading costs were not a concern with the cap-weighted S&P 500 Index on which the Vanguard 500 Index Fund is based. In a wonderful piece (Bogle 2005), he emphasized that the net returns actually delivered to investors represent the gross returns in the financial markets minus the costs of financial intermediation. While gross returns are fleeting and essentially unknowable in advance, the costs of financial intermediation are large and highly predictable. He referred to this as the “cost matters” hypothesis. Because many mutual funds are public companies answerable to their shareholders, considerable costs are expended in marketing that, as he argued in Bogle (2009), are financed through the large soft-dollar budgets of actively managed funds. By creating a fund that was owned and controlled by its fund investors, with strictly limited trading and marketing expenses and no soft-dollar expenses, he could create a fund that embodied the high purpose he envisioned for the mutual fund industry in his 1951 Princeton University undergraduate thesis. As he argued in Bogle (2014), history has shown that compared with costly actively managed funds, low-cost index funds create extra wealth of 65% for retirement plan investors. It took a while for the business model of the world’s lowest-cost mutual fund to gain acceptance and succeed (Bogle 2016). However, his innovation has become one of the great success stories of the investment management industry.

A common thread in all of his writing—from his wonderfully articulated undergraduate thesis in 1951, “The Economic Role of the Investment Company,” to his most recent piece published in the Financial Analysts Journal (Bogle 2018)—is his view of the high purpose served by the mutual fund industry and the important role of fiduciary duty to mutual fund investors. As he explained in Bogle (2006), it was through the passage of the Investment Company Act of 1940 that the US SEC called on funds to serve in the useful role of providing a voice for the great number of small investors in corporations in which funds are invested. Interestingly, Bogle noted, the birth of this industry in its present form, following passage of the Investment Company Act of 1940, was almost coincident with the first publication of the Financial Analysts Journal in 1945. Bogle himself has been associated with this industry since at least 1949.

Jack Bogle was very important to the Financial Analysts Journal, not only as a supporter but also through his many contributions to it. These contributions trace but do not by any measure represent the sum total of Jack Bogle’s thought leadership.¹ Nor do they reflect his generosity, his philanthropic activities, or his warmth and friendship. At a personal level, I greatly value the opportunity I had to work with him on the last several pieces he published in the Financial Analysts Journal (Bogle 2016, 2017, 2018). He was a thought leader who—through his many books, articles, and lectures—argued the case for investing rather than speculating and the manifest common sense of becoming rich slowly. His commentary and contributions will be missed by the readership of the Financial Analysts Journal.

Notes

¹ In this very brief review, I do not touch on his very important contributions to our understanding of the financial crisis (Bogle 2008; Bogle and Sullivan 2009) or his more recent work on corporate governance (Bogle 2017, 2018)—both of which are related to his central interest in the mutual fund industry.