Last month, Vanguard Group founder John C. Bogle -- long retired but still the biggest mutual fund company's top pitchman -- marked 65 years selling investments in an address to Vanguard managers, which he has reworked as an essay. Some highlights:
SIZE: "The Vanguard that we know today is a colossus. Worldwide, we manage more than $3.5 trillion on behalf of some 20 million clients. Our fund assets now total more than those of our two largest competitors, combined. During the past two-plus years alone, investors have entrusted an average of some $1 billion to our care on each business day..."
HUMILITY: This "is also a solemn reminder of the fiduciary duty that we owe to our client/owners..."
PROSPERITY AND DESTRUCTION: Vanguard, founded in 1974, "survived and then we prospered... largely because, over my long career, we changed our enterprise so dramatically... In today’s world of creative destruction, we are the creative destroyers of a flawed investment system..."
When Vanguard counted its first $4 billion in client money back in 1981, Bogle recalls that he cited the brooding Roman emperor Marcus Aurelius:
"Time is a sort of river of passing events, and strong is its current; no sooner is a thing brought to sight than it is swept by, and another takes its place, and this too will be swept away."
Stocks had been weak since the 1970s. Investments were "in crisis. But it was also our moment of opportunity," Bogle recalled.
BAGELS VS. DONUTS: Wellington Fund (mixed stocks and bonds, "the industry's bagel -- hard, crusty and nutritious") was for years Vanguard's predecessor company's only product, competing with "sweet, soft donut funds" in the go-go 60s. Boston rival Fidelity Investments "was the leader of the go-go era," enriching "Fidelity's management," if not its investors so much, Bogle said. Worse were the "financial buccaneers" who ran "ephemeral, sometimes even fraudulent" rival vehicles.
To compete, Wellington Management added the growth -oriented Windsor Fund in 1958; by 1980 it was larger than Wellington, which lost clients all through the long bear markets of the 70s.
As Vanguard grew, its investors shifted to bond funds. By 1997 Vanguard's largest product group was index funds, which now account for nearly three-quarters of Vanguard stock and bond fund assets. And there you have Marcus Aurelius' "River of Change," Bogle says.
M&A FAIL: The old Roman thought hard about leadership. Bogle cites one of his mentors, Wellington founder Walter L. Morgan (I interviewed him when he was nearly 100), and Morgan's "radical" decision to name the 35-year-old Bogle as his successor way back in 1965.
At first, Bogle sought merger partners -- American Funds in Los Angeles, then the Franklin group, then Boston's promising Thorndike, Doran, Paine and Lewis. Morgan approved that last and gave the Boston partners 40% of Wellington stock. Bogle controlled 28%. The rest was publicly-held.
The late 1960s shift from "go-go" (and early tech) stocks to the "Nifty Fifty" high-priced growth stocks "ended with a bang," the 1973-74 bear market. "Wellington Management Company’s business fell apart" amid "God-awful returns," assets fell more than half. And Wellington's "corporate politics" -- the larger number of Boston partners -- "made me the target."
LAUNCHED: What happened next, as Bogle never tires of telling, was his train ride to New York to propose the Wellington funds' directors buy Wellington Management Co.: "I was fighting for what was right, for declaring the independence of the funds to serve their shareholders as their highest priority.... I was also fighting for my own survival,to preserve my own career."
After a seven-month review, the board bought Bogle's plan. He calls the resulting Vanguard group "the first truly mutual mutual fund organization, operating at an at-cost basis."
(It's a characterization that scholars and tax lawyers challenge, since Vanguard's actual legal status is that of a private, for-profit company. Read more here.) Bogle's first innovation was to set up "a company responsible solely for the funds’administrative activities," to which by 1977 he had added investment management, distribution and marketing. He had to pick a new name, and kept with the Napoleonic-era British Navy theme.
LITANY: On Bogle's watch, Vanguard set up:
- 1974: "Our strategy of focusing on mutual funds that would provide 'relative predictability' of returns. The idea was to parallel the returns of our peers before the deduction of costs, thereby almost certainly whipping them over time ...
- 1975: "World's first indexed mutual fund... the 500 Index Fund... the apotheosis of relative predictability, matching with precision the returns of the S&P 500... with minimal cost... designed to mitigate surges in cash flows from investors, and build a durable shareholder base...
- 1977: "We abandon(ed) our long-standing policy of distribution by brokers... going 'no-load'." (After Bogle left, Vanguard's Exchange-Traded Funds, ETFs, would prove very popular among brokers.) Also that year, Vanguard rolled out the "first" short-term, intermediate-term, and long-term tax-exempt bond funds, advised by Citibank.
- 1978: Dropped "growth" stocks from Wellington Fund assets
- 1980: Fired Wellington Management and Citi as bond-fund managers, built an in-house Vanguard fixed-income team
- 1984: Partnership Plan, which originally paid "substantial annual distributions to each one of our crewmembers, based on cost savings to our clients and the relative performance of our funds."
Later modified. The plan now pays millions to Vanguard's top bosses, though how much Vanguard won't say. Bogle has said it was a mistake to stop reporting executive comp when he ran things.
- 1985: "Substantially eliminated Pennsylvania franchise taxes" of 0.1% on assets/year by threatening to move Vanguard out of state. The General Assembly and Gov. Thornburgh surrendered, "unanimously!" agreeing to end the tax. Also that year: first Vanguard bond index fund.
- 1987: Started "Swiss Army," forcing managers to take customer calls in busy periods.
- 1988: Hired McKinsey to develop information technology plans, which over time enabled Vanguard to automate a lot of customer-service, compliance and advisory work, and to keep its human headcount and office footprint nearly in recent years, as assets scale much higher.
- 1992: Growth and Value Index Funds; early version of Target Retirement Funds.
- 1993: Got shareholders to approve "competitive" fees for Vanguard funds, and not base them solely on actual cost or "fairness," when "establishing the allocation of costs among the funds."
Vanguard then moved to cut fees for richer clients, by marketing the first Admiral funds, which now account for most Vanguard assets.
Bogle also got shareholders to vote away their right to approve changes in fund managers. He wrote that he now regrets not adding a requirement that shareholders vote on any fee increases (Vanguard fees sometimes go up a bit when there's a hiccup in new fund sales).
- 1994: "We successfully negotiated sharply lower fees with our existing advisers... The Wellington Fund advisory free rate was cut from 35 basis points to 5; the GNMA fee from 10 basis points to 2; the Wellesley fee from 52 basis points to 7..."
- 1995: "Our worldwide expansion started with the decision to open an operation in Australia," followed by London, Hong Kong and Tokyo in 1998, and more later."
Bogle noted his books (and company reports and Web postings) are important parts of Vanguard's internal and outside propaganda.
Delaware judge William Allen, Yale investor David Swensen, ex-SEC chair Arthur Levitt, and ex-President Bill Clinton, among other prominenti, have written forwards to Bogle's books.
(Clinton was also paid $400,000 to talk to Vanguard client conferences in 2012, spokesman John Woerth confirms. That's double what we in the financial media have previously reported; there were two Vanguard Vision conferences, at $200,000 each.)
WARNING: Bogle also issued this warning, citing poet and historical-writer Carl Sandberg: "When an institution goes down or a society perishes, one condition may always be found: they forgot where they came from."
"I pray that none of our crew members—past, present, and future—will ever forget where we came from... Do what’s right for our clients by managing our mutual funds solely in their interest. Provide them with complete, accurate, and explicit information. They are our owners, for heaven’s sake! Ensure that our funds are subject to adequate independent scrutiny...
"In 1998, in my tribute to Wellington founder Walter Morgan on his 100th birthday, I cited the durability of his basic tenets: investment balance, conservative investing, long-term focus for our funds and clients alike; fair dealing; loyalty; and equitable and honorable relationships with those whom we serve and those with whom we serve...
PERILS OF SIZE: "As our organization grows, a culture of caring becomes more and more difficult to maintain.
"When Vanguard began, there were just 28 of us; today, we number 16,000 crewmembers. I’ve been concerned about this aspect of our growth since at least 1989, when I first warned our crew about the perils of enormous size, even when assets under our management were $47 billion, a tiny fraction of today’s trillions...
LOOKING BACK: "I’ve had lots more success than failure, lots more pleasure than pain, lots more laughter than tears, lots more good decisions than bad ones, lots more fans (yes, Bogleheads!) than detractors,and lots more good health than peril. (Thanks, anonymous donor of my heart!)
"At this late date, I can’t be sure of the goals that I set for myself when I began my career 65 years ago. But I think that it’s fair to say that I hoped to make a difference; to achieve personal success; to be free of financial stress; to make a name for myself; to create and to communicate; and to do the best work of which I was capable."
HAMILTON? "I hoped to achieve these goals, as it would happen, in the same way that my hero Alexander Hamilton strived to achieve his goals. In the words of Lin-Manuel Miranda, creator of the runaway Broadway hit Hamilton:
"All in the strength of his writing, he embodies the word's ability to make a difference . . . The ten-dollar founding father without a father, got a lot farther, by working a lot harder, by being a lot smarter, by being a self-starter."
"...None of you may know this yet (maybe you have to be 85 or older), but as the sands of time pass through the hourglass of your life, you start to consider what has been really important to you in your career.
"For me, it is not creating a colossus... It is being responsible for two great investment innovations—one in structure, one in strategy—that, with a powerful synergy, are changing the world of finance to the benefit of investors and their families, helping them to achieve their financial goals... Press on, regardless!”
