Earlier this week, the Indian authorities granted Marcellus the license to operate a mutual fund company. We at Marcellus feel privileged to be given the opportunity to help Indian families fulfil their financial and hence life aspirations. With this responsibility, we feel appropriate to invoke the man who has made the most difference to ordinary investors’ financial health in human history – Jack Bogle, the founder of Vanguard, by introducing to the world arguably its biggest financial innovation – the index fund. Just a month ago, Vanguard’s first index fund (now the world’s largest fund) celebrated its 50th birthday.
“…all share classes of the fund, including the investor share class of Vanguard 500 Index VFINX, have $1.67 trillion in assets. According to the Investment Company Institute, index mutual funds and exchange-traded funds comprise 50% more assets than actively managed US stock funds.”
Allan Roth writes in the Morningstar about the history of its creation: “A quarter century before the launch, as a young Princeton student, Bogle wrote his senior thesis stating mutual funds can make no claim to superiority over the market averages. As his career took off and he rose to chairman of Wellington Management, he put the idea of indexing on hold. In fact, in 1960, Bogle used the pen name John B. Armstrong in an article he wrote for the Financial Analysts Journal titled, “The Case for Mutual Fund Management” to defend professional active management.
In 1974, the board of Wellington Management fired Bogle as a result of an unwise merger he orchestrated. But Bogle was still chairman of the 11 Wellington mutual funds. The Wellington board voted to keep running all of the funds’ operations except for administration. The directors of the funds then set up a new administration company with Bogle as the CEO. The name of that company was Vanguard.
Rather than creating a for-profit company, Bogle and the fund directors structured the new firm to be owned by the funds themselves. Thus, the shareholders would own Vanguard. Says Bogle, “No man can serve two masters,” referring to investors and owners of the investment management company.
Bogle returned to the idea from his Princeton thesis, and on Aug. 31, 1976, he launched the First Index Investment Trust, which tracked the S&P 500 index. The fund initially had a sales load of as much as 6%. Bogle’s goal was to raise an initial $150.0 million, but the IPO only brought in $11.3 million. In fact, it didn’t have enough funds to buy all 500 stocks in the index; it could only buy 280. Bogle called it a “complete flop,” while the industry called it “Bogle’s folly” and indexing “un-American.”
How did Bogle feel after the flop? I spoke with Roger Wood, then an officer of the lead underwriter of the fund, Dean Witter. When it became apparent the amount raised would be only a small fraction of the goal, Wood says he offered to cancel the effort and reimburse Vanguard for its substantial out-of-pocket costs. Wood told me Bogle responded emphatically with something like, “Heck no. We will have the world’s first index fund, and this is the beginning of something big.”
Andrew Bogle told me that, while his dad viewed the amount raised as a flop, he viewed the IPO as a huge success in that the first index mutual fund was officially launched. Andrew Bogle also said that his dad viewed the Bogle’s folly criticism as free media coverage.
Vanguard would go on to attract trillions of dollars, but another way to define success is that a $15,000.0 investment in that first index fund at its launch is worth more than $3.6 million today, by my calculations.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
