Bogle’s Start At Wellington Management Company
When Bogle joined Wellington in July 1951, there were a total of 125 mutual funds in America, and Wellington was one of the ten that collectively represented nearly three-fourths of the industry’s assets. Wellington had assets of $150 million, while the biggest fund, Massachusetts Investors Trust, had $438 million.
Wellington was just the right place for an ambitious, sharp college graduate like Bogle: a tight-knit team of 60, a good reputation, and an upward growth trajectory. He threw himself into everything from administrative tasks to drafting up shareholder resolutions. Bogle’s enthusiasm didn’t go unnoticed, and by 1955, he was made Mr. Morgan’s personal assistant, with a broad mandate to examine the fund’s activities. Three years later, in 1958, Bogle helmed the launch of the Wellington Equity Fund, which was structured to invest only in stocks. This was significant because at the time, most firms, including Wellington, only managed a single fund. The success of the Wellington Equity Fund made Bogle Mr. Morgan’s heir apparent. He was named to Wellington’s board in 1960, appointed administrative vice president in 1962, and executive vice president in 1965.
All this while, Wellington had built up a reputation for being a very conservative fund because of their policy to balance their stock portfolio with bonds. This approach set them apart from other “conservative” funds, whose idea of diversification only involved investing in a variety of high-quality stocks. Wellington’s motto, on the other hand, was the promise of “a complete investment program in one security.” This did not bode well for the firm in the “Go-Go” years of investing in the 1960s. When Bogle became president, the Go-Go era was at its peak, and prevailing wisdom favoured risky stock funds over conservative ones. Bogle writes:
To use a culinary metaphor, Wellington was the industry’s bagel – hard, crusty, and nutritious. But by 1965, the industry had developed a taste for doughnuts – sweet, soft, and bereft of nutritional content. Doughnut shops, as it were, proliferated. Bagel buyers almost vanished. We could only watch helplessly as the balanced-fund share of industry sales fell from a high of 40% in 1955 to 17% in 1965 to 5% in 1970. By 1975, it would tumble to a mere 1%. What was the owner of the bagel shop to do? The strategy for survival was obvious: start selling doughnuts.
Bogle would soon get the chance to put this strategy into practice. In the spring of 1965, Mr. Morgan handed over leadership of the fund to Bogle with a weighty mandate: “Jack, I want you to take charge and do whatever it takes to solve our problems.”
To extend Bogle’s culinary metaphor, he determined that the best way for a bagel shop to pivot to donuts was to merge with a donut shop. The first three funds that Bogle approached with the merger proposal turned him down. The fourth time, it turned out, was the charm. Thorndike, Doran, Paine & Lewis, Inc., a small Boston firm that ran a successful Go-Go fund called Ivest accepted Bogle’s offer. As part of the deal, shares of Wellington Management Company were offered to the merger partners — the four Bostoners collectively held 40% and had effective voting control, Bogle controlled 28%, and public shareholders owned the remaining 32%.
Even as the merger was coming into existence, Bogle suspected that the happy peace between the partners was unlikely to remain. He writes:
At the celebration of the merger, I gave each of my new partners a small silver tray on which I had cemented a $1 coin with ‘peace’ engraved on its face, known as the ‘peace dollar.’ I feared that peace with my partners would not endure, but I hoped that we could make it work…I was not unaware that, were there ever to be a proxy fight, the legacy shareholders would likely vote with me.
The merger was well-received by the press. Publisher Institutional Investor wrote in a piece titled “The Whiz Kids Take Over at Wellington”:
Wellington gets a hot research group deep with young investment management and analyst talent, and Ivest gets the benefit of Wellington’s prestigious name, its powerful distribution organization, and the administrative and marketing talents of John Bogle.
After the Merger
The merger was off to a strong start. Ivest’s assets grew from $50 million at the end of 1966 to $340 million by the end of 1968, and Wellington created many new funds aimed at leveraging the market conditions. In these happy times, the relationship between the Boston partners and Bogle flourished, he was even quoted as saying that the merger had “worked better than anyone had expected.”
The Go-Go years — where speculative funds were all the craze — turned into the Nifty Fifty era — where the market was singularly focused on growth at any price, often ignoring metrics like valuation. And then, finally, the bubble burst. After peaking in early 1973, the American stock market fell by 50% to its low in October 1974. Wellington was not immune to the downturn. Three of the four new high-risk funds that were formed after the merger collapsed, as did two of the funds formed by Bogle’s partners outside the merger. Bogle writes of this time:
Worst of all, under its aggressive new managers, the asset value of the once-conservative Wellington Fund tumbled big time. During the decade from 1966 to 1976, this premier balanced fund turned in the worst performance of any balanced fund in the land.
Around this time, Bogle gave a speech at the annual gathering of the firm’s investment professionals, and quoting a lecture delivered by Justice Harlan Fiske Stone at the University of Michigan Law School over three decades earlier, he said:
Most of the mistakes and major faults of the financial era that has just drawn to a close will be ascribed to the failure to observe the fiduciary principle, the precept as old as holy writ, that ‘a man cannot serve two masters’. Those who serve nominally as trustees but consider only last the interests of those whose funds they command suggest how far we have ignored the necessary implications of that principle.
He added that the conflict between the “profession of investing” and the “business of investing” should be resolved in favour of the client. To understand what he means, we need to look at how mutual funds were typically structured at the time.
The conflict in question was one that every management company in the traditional mutual fund structure experienced. They had two, somewhat conflicting obligations:
The management company must maximise value for their (management company) shareholders, which often means charging fees on the funds they manage.
The management company must maximise investment returns within the mutual funds, for the sake of mutual fund shareholders.
In his speech, Bogle proposed a solution:
I then suggested that one way of resolving this conflict could be a mutualization, whereby the funds acquire the management company…or internalization, whereby the active executives own the management company, with contracts negotiated on a ‘cost-plus’ basis, with incentives for both performance and efficiency, but without the ability to capitalize earnings through public sale. When I spoke those words, I could not possibly have imagined that, within three short years, I would not only talk the talk about mutualization, but would walk the walk.
This did eventually happen, but not in the way he expected it would.
For reference, mutual funds structured as per Bogle’s solution would look like this.
As the bear market took hold, the camaraderie between Bogle and his merger partners quickly fell away. Both sides found bones to pick. Bogle was upset at how Wellington’s new funds were being managed, and the partners about the poor administrative management of the Ivest fund. The founder of Wellington Management Company, Walter Morgan, had to step in to play peacemaker. In Trillions, author Wigglesworth quotes Morgan:
I taught Jack to be pretty tough—like I had been, because I owned all the stock and could do any damn thing I wanted…but you can’t quite do that when you have four or five guys who are virtually equal to you.
Morgan’s intervention was not successful. The conflict between the partners became public knowledge, and the five partners attempted to clearly split responsibilities and declare a truce in 1972. This did not work either. In January 1973, the market dived to a new low. Wellington, which managed $2 billion before the merger, had shrunk to less than half that size, and the stock of Wellington Management Company plummeted from a high of $50 in 1968 to $4.25 in 1975. This increased tensions further. Jan Twardowski, Bogle’s young staff assistant, recalls: “It was awful. The elephants were fighting, and we mice were scampering trying not to be trampled. It got quite vicious. Clearly, a reckoning was looming.”
A reckoning was looming indeed. In November 1973, the partners asked Bogle to leave Wellington, offering him a $20,000-a-year annuity for the next fifteen years to exit without a fuss. Bogle turned them down, saying “I’ve heard of few stupider things than that.” To Bogle’s horror, when he called on Wellington’s directors, he realised that the partners had enough votes to fire him. Instead of backing down though, Bogle’s resolve grew stronger; he dug his heels in and refused to resign.
Things came to a head at a board meeting on January 23 1974. Many close to Bogle thought that it would mark his last day at the company, even though Bogle himself failed to acknowledge this. A close associate of his said, “It was this sort of blind confidence in himself, which convinced him that everybody else would eventually understand that he really is the best person to do this job.”
Bogle presented a 20-page memo to the board that he hoped would save his job. The memo proposed that the funds should acquire the management company, or in other words, Wellington should mutualize itself and become a subsidiary of the funds that would operate at cost. The merger would be dissolved and Bogle would continue to lead the charge at Wellington. Bogle’s proposal was shot down. The board gave him another chance to resign, and when he refused, they voted to fire him. Bogle was replaced with Robert Doran as the president of Wellington.
Bogle’s Comeback—and The Birth of Vanguard
Bogle was technically out the door already, but he wasn’t ready to leave. He got his hands on a legal technicality to claw his way back into the company. To understand the loophole that Bogle was relying on, we need to go back to the structure of mutual funds at the time. Mutual funds were mandated by law to have their own board of directors, a majority of whom were supposed to be independent from the investment management company who controlled the money being invested. In reality, however, these directors weren’t independent. They were picked by the investment managers, with the objective of cutting costs and staying in a position of de-facto control. And even if they had been independent in spirit, Robin Wigglesworth writes that it would be “extraordinarily difficult” to justify removing a fund’s investment manager, given that the board’s “primary role” was to ensure that the “fund’s administration is effective, review expenses and fees, and monitor for any potential conflicts of interest.” In any case, Bogle knew the directors of the Wellington funds better than his merger partners, and even though they had added a few Ivest directors to the boards, they did not have a clear majority. Bogle saw this as an opportunity, he writes: “I was determined to win at the craps table what I had lost at the roulette table.”
On January 24 1974, a day after Bogle had been fired, he called a meeting of the directors of the funds, and proposed the same radical solution: mutualisation of the funds and independence from the investment managers. Bogle described the scene as, “an extraordinary confrontation between a group of mutual funds with its own CEO (me) and its long-time investment adviser, Wellington Management Company, then holding virtually complete control over the funds’ affairs.” The fund directors asked him to provide an analysis of the options available to them for dealing with the crisis.
Bogle came back to the board with a 250-page memo titled “The Future Structure of the Wellington Group of Investment Companies.” This listed the following seven options to the board:
Option #1 – Status Quo: Continuation of all existing relationships.
Option #2 – Internal administration by fund staff.
Option #3 – Internal administration and distribution by fund staff.
Option #4 – Mutualization: acquisition by the funds of all Wellington Management Company fund-related activities, including investment advisory services.
Option #5 – New external investment adviser(s).
Option #6 – New external management company for the group.
Option #7 – Build a completely new internal organisation.
Bogle favoured Option #4 — which advocated his radical solution of mutualization — but he was aware that the board was unlikely to approve it. In Stay the Course, he says:
I favored a complete mutualization of the funds’ operations, to be achieved by purchasing Wellington Management’s mutual fund business, unscrambling the egg,’ as it were, that I had created with that failed 1966 merger. Yes, mutualization was totally my idea, and I realized that a mutual company would never provide me with the personal fortune that so many denizens of Wall Street would earn. But it offered, I believed, my last, best chance to resume my career. Innovations without precedent, however, no matter how sensible and logical, are rarely able to win the approval of conservative directors. Nor were they likely to gain the favor of the cautious legal counsel whom the directors had retained, Wall Street attorney and former SEC Commissioner Richard B. (Dick) Smith, Esq.
Bogle strategically pushed for Options #2 and #3 of the list above, both of which offered the funds progressive degrees of independence. Option #2 gave the funds autonomy over administrative matters, while Option #3 proposed control over administration and distribution, or the process of marketing, selling, and delivering mutual fund shares to investors. Both these options were less radical than the mutualization in Option #4. In a memo to the board on March 11 1974, he clarified how he thought about it:
Option #2 is small in terms of people, but large in terms of dollars, and important in terms of concept. The second step – adding “internal distribution” under Option #3 – also seems particularly appropriate. But if it is not accepted now, it may well be only a matter of time, perhaps within two to three years, when it will be accepted, given the truly massive challenges to be faced in mutual fund distribution. When that step is taken, it may well be only a matter of some more time until the fund Board will first reconsider, and then act to alter, our Group’s acceptance of the traditional industry structure involving an external investment adviser.
An early New York Times edition on March 14 1974 published a story about the coup titled: “Ex-Fund Chief to Come Back.” In later editions on the same day, the story and photo of Bogle remained the same, but the headline ended with a question mark. Bogle says, “that haunting question mark in the headline hinted at the uncertainty of the outcome of the struggle that was going on behind the scenes.”
On June 20 1974, the board made a decision. They chose Option #2 — Wellington funds would set up a subsidiary to handle all internal administrative tasks. Bogle would claim that the decision had him fired up with enthusiasm, however, in truth Bogle was angry and humiliated. An acquaintance of Bogle’s who happened to meet him around this time said: “He was bitingly angry…I think these guys [Thorndike, Doran, Paine, and Lewis] were essentially the founders of Vanguard because they made him angry enough that he wanted to prove that what they thought was just the tail of the dog was going to wag the dog.”
Vanguard was incorporated on September 24 1974, with a 27-person team led by Bogle as chairman and chief executive. The U.S. Securities and Exchange Commission (SEC) approved the reorganisation on February 19 1975, followed by the fund shareholders who approved the new structure, along with a proposal to reduce the fees paid by the funds to their investment managers, Wellington Management Company by 5%.
Vanguard’s official mandate was narrow, looking after things like “bookkeeping, filing tax returns, government reporting duties, and handling shareholder records.” The company operated at cost, returning any profits to the constituent funds.
From a practical perspective, it was a strange time for the new group and its team. In Trillions, Wigglesworth writes:
The messy practical process of the bifurcation was still under way, with some Wellington staff being sent up to Boston and others staying in Valley Forge, where they would work cheek-by-jowl with their old/new colleagues at Vanguard.
The media viewed the new structure with scepticism. A May 1975 Forbes article treated it with disdain, publishing an article titled, “A Plague on Both Houses?” The air of doubt carried over to the investment world. Bogle recalls two professional acquaintances approaching him: one to congratulate him and the other to discourage him. On the whole, though, the industry ignored the creation of Vanguard.
The World’s First Index Fund
One month after Vanguard’s incorporation, in October 1974, Nobel laureate Paul Samuelson published an article that — much like the Fortune magazine piece which brought the mutual fund industry to Bogle — changed the course of Bogle’s life, and Vanguard’s trajectory. Dr. Samuelson wrote that he couldn’t find “brute evidence” that investment managers could beat the returns of the S&P 500 “on a repeatable, sustained basis”. He conceded that there might be some unusually intelligent managers who could beat the market, but they were few in number, and unlikely to provide their services cheaply to the general public. Dr. Samuelson came to the conclusion that given the costs of trading, the efforts of managers to beat the market was a waste. He wrote:
I would like to believe otherwise. But a respect for evidence compels me to incline towards the hypothesis that most portfolio decision makers should go out of business—take up plumbing, teach Greek, or help produce the annual [gross national product] by serving as corporate executives.
Dr. Samuelson went on to say:
As yet, there exists no convenient fund that apes the whole market, requires no load, and keeps commissions, turnover and management fees to the feasible minimum.
In other words, Dr. Samuelson was pointing out that a true index fund did not exist yet, and to Bogle this may as well have been a personal call to action. Index-like portfolios had existed within pension funds, but the mutual fund industry remained entrenched in its expensive, traditional models. None of Vanguard’s competitors were motivated to shift away from this structure — and why would they — when they would have to give up such healthy fees? But Bogle had not much to lose. Along with his associates at Vanguard, Bogle, Jan Twardowski and James Riepe set out to make a case for an index fund modelled on the S&P 500. Their research painted a compelling picture: the average equity mutual fund returned 9.7% compared to the S&P 500’s 11.3%. In September 1975, Bogle made a formal recommendation to this effect to the board of directors.
The board was dubious of the proposal, and found fit to remind Bogle that Vanguard’s mandate limited the company from engaging in investment advisory. Bogle had a response ready:
Vanguard’s operating an index fund did not violate the ban on our providing the investment advisory services to our funds. It would simply own all 500 stocks in the S&P 500 Index. It would employ no investment adviser, and so would not be ‘managed.’ A public underwriting could be handled by an outside syndicate of brokerage firms.
If you think that sounds insincere, Bogle would agree. He writes in his autobiography:
Disingenuous or not, my argument that the index fund was not managed carried the day. With less controversy than I had expected, the board approved my proposal by unanimous vote.
In December of 1975, Vanguard set into motion the establishment of the “First Index Investment Trust” (FIIT). A draft prospectus was prepared, which projected that the cost of managing the index fund would be 0.3% in operating expenses and 0.2% in transaction costs, as compared to 2-3% for an actively managed fund. Bogle recounts his philosophy that “great long-term rewards can result from small differences in cost.”
The Vanguard team, with Bogle at the helm, got to work on all the tasks to make the index fund operational. Vanguard signed a deal with S&P to licence their index for a nominal sum — nominal, since the company had not yet recognised its potential as a revenue stream. The next step was to raise enough money for the fund to invest in all the stocks on the index, and a team of reputed brokerage firms and underwriters was assembled to lead the offering. Bogle was confident that he would be able to raise $150 million, more than enough to buy all the stocks to mimic the S&P 500. Two influential articles praising the creation of index funds, including one authored by Dr. Samuelson, fanned Bogle's optimism. He did not anticipate how difficult it would be to actually raise money for FIIT, or how far below his prediction of $150 million they would fall.
FIIT was only able to raise $11.32 million, which wasn’t even enough to buy all the stocks on the S&P 500. The poor reception sparked criticism of index funds in the market. Bogle remembers a competitor's snide remark: “who wants to be operated on by an average surgeon, be advised by an average lawyer, be an average registered representative, or do anything no better or worse than average?” The underwriters even asked Bogle if he wanted to pull the plug on the idea, but he refused, saying: “No, we have the world’s first index fund, and this is the beginning of something big.” Bogle directed Twardowski to adjust the index so that they could replicate the S&P 500 with their limited resources. The algorithm was tweaked such that FIIT would invest in 200 of the largest stocks on the S&P 500 that represented 80% of the index on a weighted-basis, and another 80 smaller companies that were selected for their ability to best mimic the rest of the index — and with that, FIIT was off to the races.
In later years, Bogle would claim that he was ignorant of the academic research and the smattering of practical experiments that touched upon indexing, however, Wigglesworth comments that “this simply isn’t credible”. Even though Bogle did believe that the fees charged by investment managers were too high, the first index fund was largely circumstantial. Twardowski remarks: “In the later years, he would say that he understood all these things and he planned all this. Not so much. Who could have predicted the indexing revolution? But it turned out quite well.”
The formation of FIIT was strategically important for Vanguard, but this wasn’t at all clear given the trust’s financial impact. Retail investors were still dazzled by investment managers who promised sky-high returns, and selling them a passive fund that tracked an index was not easy. It also didn’t help that the S&P 500 itself fell behind the returns of the average fund manager — after outpacing 70% of all equity funds from 1972 to 1976, it outperformed just 25% from 1977 to 1982. As a result, by the end of 1976, FIIT had amassed just $14 million in assets, and it would take half a decade more for it to cross the $100 million mark (and that too, only because it merged with a fund that it administered, a $58 million exchange fund called Exeter). Bogle himself described FIIT as “an artistic, if not commercial, success.”
The lacklustre launch of FIIT deterred competitors from starting an index fund of their own for several years. It wouldn’t be until nearly a decade later that a second index fund entered the market. It took a long time — 15 years, by some counts — for the index fund model to be successful enough to pose a threat to other managers. This lack of competition gave Vanguard a window of opportunity to grow slowly.
In these early years, Vanguard was fuelled by the success of the money market fund which the company launched in 1975. A money market fund is one that invests in short-term, high-quality debt that typically matures in under nine months. This type of fund became popular when the Federal Reserve increased interest rates in the 1970s to reduce inflation in the American economy. By the end of 1981, the total assets of the Vanguard funds rose from $1.47 billion in 1974 to $4.11 billion in 1981.
Vanguard Inches Toward Independence
One of the reasons why retail investors were not inclined to invest in FIIT was because of the load fees they had to pay. As a reminder, load is the fee that investors had to pay when buying or selling shares of a mutual fund. FIIT charged just 0.3% a year, but investors would have to pay an additional load of 6% to a broker every time they transacted. They were not willing to do that for a fund which was passively managed, especially the institutional investors who Bogle wanted to attract to FIIT. When traditional mutual funds began to shift to no-load structures in the 1970s, Bogle was only too happy to join them.
Bogle addressed a letter to the directors proposing that Wellington funds terminate their distribution agreement with the Wellington Management Company and shift to a no-load structure. His argument to the board was similar to the one he made when he proposed the establishment of FIIT:
My claim to the board (again accurate, if perhaps disingenuous) was that we were not violating our pledge that precluded Vanguard’s engaging in distribution. We were simply eliminating distribution.
Bogle’s old merger partners opposed the proposal, but their arguments fell flat, and the board gave Bogle the green light on February 8 1977. This angered the brokers who had distributed Wellington’s funds for nearly half a century, but they were reluctant to take any real action because Wellington’s equity fund (now called Windsor) had been performing well, and brokers didn’t want to advise clients to sell their holdings in a successful fund.
To understand these facts better, here is a simplified version of how funds flow between the investor, mutual fund, and broker: when an investor purchases shares in a mutual fund, a portion of their investment is deducted as load fees to compensate brokers for their role as intermediaries. The remaining amount is then invested in the mutual fund to buy shares, representing the actual money working to generate returns for the investor.
Bogle hadn’t won the battle just yet. He needed to get the SEC’s approval to shift to a no-load structure. At the time, regulations prohibited funds from using their own assets for distribution, despite the fact that investment managers were already covering distribution costs with profits from their investment advisory services to the funds. Bogle requested an exemption from the SEC, asking permission for their funds to spend a limited amount directly on distribution. This sparked a series of complex legal challenges — including opposition from a Wellington Fund shareholder, and a formal hearing — until February 25 1981 when the SEC granted Vanguard its approval. In its final decision, the SEC said:
[The Vanguard plan] is consistent with the provisions, policies, and purposes of the [Investment Company Act of 1940]. It actually furthers the Act’s objectives by ensuring that the Funds’ directors, with more specific information at their disposal concerning the cost and performance of each service rendered to the Funds, are better able to evaluate the quality of those services. [The plan] will foster improved disclosure to shareholders, enabling them to make a more informed judgment as to the Funds’ operations. In addition, the plan clearly enhances the Funds’ independence, permitting them to change investment advisers more readily as conditions may dictate. The plan also benefits each fund within a reasonable range of fairness. Specifically, the [Vanguard] plan promotes a healthy and viable mutual fund complex within which each fund can better prosper; enables the Funds to realize substantial savings from advisory fee reductions; promotes savings from economies of scale; and provides the Funds with direct and conflict-free control over distribution functions.
Vanguard inched closer toward its goal of being independent of its management company while still embroiled in legal challenges with the SEC. In 1977, a regulatory shift allowed mutual funds to pass tax-free income from municipal bonds directly to investors. Vanguard took advantage of this to set up a municipal bond fund, the Warwick Municipal Fund. This fund had a no-load structure, and in another first for Wellington, would be managed externally — by Citibank — instead of the usual in-house arrangement with Wellington Management Company. Phil Fina, one of Vanguard’s attorneys at the time, described this decision as “significant” because it “set in motion the possibility that Vanguard would be restructuring itself and making its own decisions.”
In 1980, the Vanguard team grew dissatisfied with Citibank’s management of the Warwick Municipal Fund. Bogle was equally unhappy about the high fees that Vanguard’s money market fund was paying Wellington Management Company. Seeing an opportunity to address both problems, Bogle made a bold proposal to the board. He suggested the termination of the municipal fund’s relationship with Citibank and the creation of a management team within Vanguard. This in-house team would be compensated with a fixed salary and in addition to managing the municipal fund, would replace Wellington as the manager of the money market fund, “in part to reduce fees and in part to obtain ‘critical mass’ for gaining economies of scale.” The board blessed Bogle’s proposal in September 1980.
Vanguard put its plans to have a fixed-income investment staff into action. A small team of seven professionals and a small administrative staff were assembled that managed Vanguard’s municipal bond and money market fund whose combined assets came to $1.75 billion. In his autobiography, Bogle writes:
Vanguard’s foray into active fund management was not only economically important but conceptually critical. While we had arguably ‘broken the ice’ in acting as an investment adviser in 1975 when we created First Index Investment Trust, the board’s 1980 decision clearly brought us into active fund management for the first time.
Bogle’s Vindication
These triumphs were momentous for Bogle, but the growth of FIIT was slow. A year into its existence, in 1976, FIIT’s assets were $14 million, ranking the fund 152nd in size among 211 equity funds. By the end of 1982, this number had increased to $100 million, ranking it 104th among 263 funds. FIIT reached the $1 billion mark only six years later in 1988, ranking 41st among 1,048 funds.
The growth of the index fund industry itself was sluggish, perhaps because of FIIT’s lacklustre early performance. The second index mutual fund run by Wells Fargo only entered the market in 1984; and by 1990, the number of index funds had only grown to five, with total assets of $4.5 billion, still just 2% of the assets of all equity mutual funds.
The perception of index funds has evolved dramatically over time. In his autobiography, Bogle described this change, and Vanguard’s role in it, in the following way:
The concept that fund managers could not add value to their clients’ wealth, once considered nearly heretical, is now broadly accepted. It has led to a disruptive revolution in the mutual fund industry, largely driven by the rise of index funds. The index revolution, in turn, has been led by Vanguard.
The odds against Vanguard’s ever coming into existence, let alone surviving that first decade, were staggering. To paraphrase a line from the hit musical Miss Saigon, Vanguard was “conceived in Hell and born in strife.” Its creation was the result of an unsatisfactory compromise that ended an ugly fight for control of Wellington Management Company, a fight that cost me my job as CEO and made it appear for a time that my career in the industry I loved was over. But, by a series of unlikely but happy events, even coincidences, I made a comeback.
Today, Vanguard dominates the index fund market. As of mid-2018, assets of Vanguard 500 Index Fund totaled $640 billion, second in asset size only to Vanguard Total Stock Market Index Fund, among 5,856 equity mutual funds. In his 2018 autobiography, Bogle cites Vanguard as overseeing “some 51% of the total $6.8 trillion in U.S. index funds.”
Vanguard’s success as the world’s first index fund is perhaps underpinned by Bogle’s singular tenacity. Warren Buffett lauded Bogle in his 2016 annual report for Berkshire Hathway:
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade…Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”