Bogle shared something else with punk: the concept of addition by subtraction.
As Johnny Ramone once described the genre to Rolling Stone: “What we did was take out everything we didn’t like about rock ‘n’ roll and use the rest, so there would be no blues influence, no long guitar solos, nothing that would get in the way of the songs.” Punk rock was, as the magazine had previously written, “a negation, a call to stark, brutal simplicity”,
If that doesn’t describe Bogle’s life’s work – and a low-cost index fund – I don’t know what does.
He built an entire genre of investing by trying to eliminate everything that gets in the way of investors getting a fair share of returns, including management fees, brokers, turnover, trading costs, market timing and human emotion. The company he founded would actually be owned by the mutual funds it managed – and in turn by their shareholders – so its chief incentive would be to get more and more efficient and leave more money in clients’ pockets.
Bogle knew Vanguard’s customer-owned structure would, over time, lower costs to the point that investors would beat a path to the company’s door. And they did. That structure, paired with Bogle’s contrarian attitude, has already saved investors about $US1 trillion.
But what many financial professionals and investors don’t realise, and what I document in my book, is that index funds were merely a byproduct of Vanguard’s unique ownership structure and arguably get too much credit for the index fund revolution. In the end, the funds needed Vanguard more than Vanguard needed them – the two just happened to be a perfect match.
Great cost migration
And what about the company’s market share, which is fast approaching 30 per cent of US fund assets? While critics of Vanguard – and passive funds in general – contend that index investing will suffer without an easy Federal Reserve monetary policy fuelling a long, boring bull market, it’s more likely that Vanguard’s market share will grow even faster in a bear market.
Even this year, as markets have wobbled with the Fed’s hawkish turn, Vanguard took in $US71 billion in the first quarter; the rest of the asset management industry, combined, saw about $US30 billion in outflows. This same pattern – well-disciplined Vanguard investors leaning in while everyone else leans out – has been seen in each sell-off of the past 15 years.
Without the subsidy provided by a bull market, increases in assets will come mainly from investment flows rather than price gains. It’s possible Vanguard could end up managing half of America’s fund assets before we see the erosion Bogle foreshadowed.
The Bogle effect means asset management will see more consolidation – and perhaps much more. In his interview for Trillions, Bogle said many will become so desperate that they’ll choose to “mutualise” just as Vanguard did.
The thought of BlackRock, Fidelity, Charles Schwab, JPMorgan Chase or Goldman Sachs mutualising is about as radical as it gets on Wall Street.
But going toe-to-toe with Vanguard will force companies to jettison their fees in a race to the bottom. The only way to slow the company down – and this is the existential threat facing Wall Street in the coming decades – is to offer funds that earn no revenue. The “better world” Bogle envisioned for investors creates a hellscape for the financial industry.
This “great cost migration” isn’t limited to funds or asset management, either. Cost compression follows wherever Vanguard goes.
The advisory business, where the company already has about $US300 billion in assets and employs more than 1000 certified financial planners, seems to be next. International markets, institutional clients, private equity and alternatives – maybe even crypto – could eventually become Vanguard victims. In a world overflowing with paths to a cheap market return, asset managers must find ways to add value by complementing index funds.
The good news for Wall Street is that, even in a Vanguardian future, a portion of flows will still want to chase performance with something besides an index. Thematic investing and high-octane stock picking both accomplish this feat.
The Bogle effect is, ironically, a big reason behind the staying power of Cathie Wood, the risk-taking manager of the ARK funds. Bogle’s success and legacy weren’t built on playing the game well, but rather on changing the entire game – to the benefit of investors.
— Bloomberg Businessweek