Pioneer in indexing retires from industry

SANTA MONICA, Calif. — When Rex Sinquefield graduated with his MBA from the University of Chicago, he knocked on the doors of bank trust departments in three states, eager to put his newly acquired knowledge about efficient markets theory to work.

But only American National Bank & Trust Co. of Chicago was interested, hiring him in January 1972 and launching the first publicly marketed equity index fund about 20 months later. Today, investors have pumped trillions of dollars into index funds, and his own firm — Dimensional Fund Advisors Inc. — has $78 billion under management.

After touting efficient markets theory as a money manager for 33 years, Mr. Sinquefield is calling it quits. At year end, he will retire as co-chair of the Santa Monica-based firm that he and David Booth formed in 1981. His wife, Jeanne, who has supervised trading at DFA since 1983, also will step down.

The Sinquefields will relocate to their 1,000-acre farm in Osage County, Mo. But Mr. Sinquefield will not take up a gentleman farmer's life. Instead, he will lead a new market-oriented think tank — the Show-Me Institute, based in St. Louis — that he hopes will influence public policy in such areas as taxation, health care and government regulation. He also will continue his work on the boards of four St. Louis-area charitable organizations.

Mr. Sinquefield's work with Roger Ibbotson — now a finance professor at Yale University and founder of Ibbotson Associates Inc. — on developing data series for major asset classes has influenced virtually every investor in public markets.

"He's one of the titans. His research into historical prices and data really became the foundation for everything that followed, both in academic research and in the application of historical data in investment management," said Michael Rosen, principal at Angeles Investment Advisors, Los Angeles. "It's almost hard to imagine a world that came before him, where we didn't know what historical returns were in various asset classes."

And at DFA, Mr. Sinquefield pursued his efficient markets fervor, developing a host of different passively managed strategies. After Mr. Sinquefield retires, Mr. Booth, DFA's co-founder, co-chair and chief investment officer, will become sole chairman. Mr. Sinquefield will remain on DFA's board and a major shareholder in the firm.

It was at the University of Chicago that Mr. Sinquefield embraced efficient markets theory. "He did have a missionary zeal. For him, the new religion become efficient markets," Mr. Ibbotson said.

Mr. Sinquefield took a senior finance course taught by Eugene F. Fama, perhaps the leading proponent of efficient markets theory. Mr. Sinquefield said he peppered Mr. Fama with so many questions the academic referred him to his two teaching assistants: Mr. Ibbotson and Mr. Booth.

The notion of creating an index fund came from efficient markets theory. That theory says the market incorporates new information so quickly that no investor is likely to consistently outperform other investors.

At American National Bank, Mr. Sinquefield put that theory into practice, getting a muted response from the institutional world, and a better reception from wealthy individual investors.

Wells Fargo Bank was the first manager to offer an index fund, an ill-fated attempt to equal-weight the S&P 500 that experienced problems tracking the index and incurred high transaction costs. In 1973, Wells Fargo sold capitalization-weighted S&P separate accounts, but Mr. Sinquefield was the first to offer commingled funds to both pension funds and individual investors.

The breakthrough in the pension fund market for American National came from Robert Shultz, supervisor of New York Telephone Co.'s $1 billion pension fund. Mr. Shultz became intrigued with modern portfolio theory and index funds, according to "The Money Flood" by Michael J. Clowes, editorial director of Pensions & Investments.

"In July 1975, New York Telephone gave us $40 million, and that was the Good Housekeeping seal," Mr. Sinquefield said in a recent interview. The other Bell subsidiary pension funds noticed, and the money started flowing in.

By the late 1970s, American National successfully launched extended-market index and international equity index funds.

Meanwhile, Mr. Sinquefield's collaboration with Mr. Ibbotson set the industry on its ear. It began with Mr. Sinquefield's need for data to support marketing efforts for the bank's stock index fund. With the help of Mr. Ibbotson, Mr. Sinquefield re-created S&P 500 data going back to 1926 — "something that Standard & Poor's didn't know how to do and said it couldn't be done," Mr. Sinquefield said. Mr. Ibbotson, who was working on his doctorate at the time, also managed the University of Chicago's bond portfolio and needed historical data to help him do his job.

The pair got such a huge response to conference speeches that they split up "so we could have twice as many talks," Mr. Ibbotson recalled.

In 1981, Mr. Sinquefield failed to persuade American National officials to launch a passive microcap stock fund — even though he was head of the trust department by then. He joined forces with Mr. Booth, who had failed to convince his bosses at A.G. Becker Inc. to launch a similar strategy. The microcap strategy, which has generated an alpha of about 200 basis points a year over the past 23 years, became DFA's first offering.