Two very important anniversaries are approaching - the 50th anniversary of Jack Bogle's entry into the mutual fund industry and the 25th anniversary of the indexed mutual fund. The two are intimately connected.
Mr. Bogle, the founder of the Vanguard Group in Valley Forge, Pa., began his career July 5, 1951, at the Wellington Fund of Boston. He started the first indexed mutual fund, then called the First Index Investment Trust and now called the Vanguard Index 500 Fund, in August 1976.
Mr. Bogle founded the Vanguard Group in 1974 after a dispute with Wellington Management Co. Vanguard was established to administer the 11 mutual funds managed and sold by Wellington.
Vanguard was prohibited from managing money by the terms of Mr. Bogle's agreement with Wellington after the split. But he soon realized Vanguard could not survive on administration fees alone and decided to start an indexed mutual fund.
When the directors of Wellington protested he was breaking the agreement, he pointed out that the index fund was not "managed."
For his troubles in starting the index fund, he received a great deal of criticism and scorn. He was accused of enticing investors to settle for "mediocrity," and the index fund was called "Bogle's folly."
Mr. Bogle paid no attention to the critics. The research he had done on mutual funds for his dissertation at Princeton University and his experience at Wellington had convinced him that mutual funds had a hard time beating the market.
He also was influenced by an article written by Paul Samuelson, the Nobel Prize-winning economist, making the same point and one by Charles D. Ellis, founder of Greenwich Associates, a financial consulting firm, about investment management being "the loser's game." And he was aware of the index funds that had been started by Wells Fargo Bank and Trust, San Francisco, and American National Bank and Trust, Chicago.
One obvious reason for the failure of actively managed funds is that they incur costs the market index does not incur, such as trading costs. Add management fees of 1% or more, and the mutual fund investor was unlikely to beat the index even before taxes. Because there was no portfolio manager to pay and no analysts, the costs of the index fund could be reduced even more. Mr. Bogle was able to offer his indexed mutual fund at a management fee of 0.45%, compared with an average for actively managed funds of 1.3%. It now is even lower, at 0.18%.
Now the fund has $92 billion, and it is the world's largest mutual fund.
Mr. Bogle's importance to investors goes far beyond the index funds. There is little doubt that his hectoring of the industry over its excessive fees, combined with the price competition offered by the index funds, has helped slow the rise of mutual fund fees in general.
He continues to point out that while mutual fund assets have grown enormously, presumably bringing great economies of scale, mutual fund management fees actually have increased to an average of 1.6%, from the 0.78% charged in 1950.
Imagine what the fees might be without Jack Bogle to help hold them down. Imagine what that would mean to 401(k) and IRA investors. Imagine what the investment industry would be like without him. Unthinkable!
