Bogle shared something else with punk: the concept of addition by subtraction.
As Johnny Ramone 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 for raw, brutal simplicity”,
If that doesn’t describe Bogle’s lifelong work — and a low-cost index fund — I don’t know what does.
He built a whole genre of investing by trying to eliminate everything that stood in the way of investors getting a fair share of returns, including management fees, brokers, turnover, trading fees, market timing and human emotion. The company he founded would actually be owned by the mutual funds it manages – and in turn by their shareholders – so his main motivation would be to be increasingly efficient and leave more money. money in customers’ pockets.
Bogle knew that Vanguard’s customer-owned structure would, over time, reduce costs to the point that investors would squeeze their way to the company’s doorstep. And they did. This structure, coupled with Bogle’s contrarian attitude, has already saved investors about $1 trillion.
But what many finance professionals and investors don’t realize, and what I document in my book, is that index funds were just a byproduct of Vanguard’s unique ownership structure and get arguably too much credit for the index fund revolution. In the end, the funds needed Vanguard more than Vanguard needed them – the two turned out to be a perfect match.
Migration at a high cost
And what about the company’s market share, which is rapidly approaching 30% of US fund assets? While critics of Vanguard — and passive funds in general — say index investing will suffer without easy monetary policy from the Federal Reserve fueling a long and boring bull market, Vanguard’s market share is more likely to rise. even faster in a bear market.
Even this year, as markets wobbled with the Fed’s hawkish turn, Vanguard took in $71 billion in the first quarter; the rest of the asset management sector, combined, saw around $30 billion in outflows. This same pattern – well-disciplined Vanguard investors leaning in while everyone else leans out – has been seen in every sell-off for the past 15 years.
Without the subsidy provided by a bull market, increases in assets will come primarily from investment flows rather than price gains. It is possible that Vanguard will end up managing half of the assets of the American funds before seeing the erosion announced by Bogle.
The Bogle effect means asset management will see more consolidation – and possibly a whole lot more. In his interview for trillionBogle said many would become so desperate that they would choose to “mutualize” just like Vanguard did.
The idea of pooling BlackRock, Fidelity, Charles Schwab, JPMorgan Chase or Goldman Sachs is about as radical as it is on Wall Street.
But going toe to toe with Vanguard will force companies to drop fees in a race to the bottom. The only way to slow down business – and this is the existential threat that will hang over Wall Street for decades to come – is to offer funds that generate no income. The “better world” imagined by Bogle for investors creates a hellish landscape for the financial sector.
This “big-cost migration” is not limited to funds or asset management either. Cost containment follows wherever Vanguard goes.
The advisory business, where the company already has about $300 billion in assets and employs more than 1,000 certified financial planners, appears to be next. International markets, institutional clients, private equity, and alternatives — perhaps even crypto — could eventually fall victim to Vanguard. In a world brimming with paths to cheap returns, 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 other than an index. Thematic investing and high-octane stock picking both accomplish this feat.
The Bogle effect is, ironically, one of the main reasons for the persistence of Cathie Wood, the risk-taking manager of the ARK funds. Bogle’s success and legacy were not built on playing the game right, but rather on changing the whole game – to the benefit of investors.
— Bloomberg Businessweek