Farewell to icon Bogle who fought high investment fees
The year started with flags at half mast at Sygnia as we heard about the death of global financial icon John “Jack” Bogle. Bogle was the inventor of low cost passively managed unit trusts and founder of the Vanguard Group, the largest index tracking manager in the world with S4.9 trillion in assets under management.
When he launched his index tracking funds in the 1970s, he was ignored and then derided by the asset management industry in an era where concepts such as “market outperformance” or “alpha” reigned supreme, Wall Street titans were the masters of the universe and maximising profits for shareholders was the sole objective of most financial firms. An investment philosophy that scorned all that Wall Street stood for and placed low management fees at its core gathered little support. Bogle, however, remained uncompromising in his belief that “because the returns investors receive come only after the deduction of the costs of our system of financial intermediation, just as a gambler’s winnings come only from what remains after the croupier’s rake descends, those relentless rules devastate the long term returns of investors”.
He became a life long advocate for investors, believing that his “relentless rules of humble arithmetic” deserved the same, if not more, attention than the efficient market hypothesis. The costs he referred to spanned everything from stockbroking charges to unit trust company fees, asset management fees and commissions. But low fees were not his only message. He also believed there was an unresolvable conflict of interest between shareholders of asset management companies and their investors. The former were motivated by charging the highest fees possible, the latter by trying to accumulate as much as they could for retirement. The two concepts are inconsistent, and hence when setting up the Vanguard Group he structured it as a mutual company, with investors owning the shares through the unit trusts they invest in. This is similar to what Old Mutual and Sanlam were many years ago before they “demutualised”. And hence, despite building the largest asset manager in the world, Bogle did not die as rich as he could have been.
By his own admission he was worth “well below” $100m a number not far off what Wall Street top executives earn in one year. In a world where your worth is measured by, literally, your worth, he stood out as an oddity, a man of uncompromising principles who improved the lives of all those who followed his advice of paying low fees, steady investing and the avoidance of market timing. His contribution to the world of finance has been enormous. His vindication came in the past decade as Vanguard’s products finally took off, drowning in new business moving away from traditional high fee charging active asset managers.
Warren Buffett’s tribute is most poignant: “Jack did more for American investors as a whole than any individual I’ve known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount.” Today, many other companies have copied his approach, to the benefit of many. His message has been validated by the numbers, with the latest S&P survey showing that in the US over the five years to the end of June 2018, only 23.5% of actively managed equity unit trusts outperformed the market index. In SA that number is a shocking 11.4%.
Bogle has taught us many lessons, which he promoted through his books, articles and even YouTube videos. He taught us to be humble about our ability to pick the winners, be it stocks or asset managers; to be pragmatic about what returns a market can and cannot deliver in the short term; to focus on treating customers fairly; to be brave even when others deride what you advocate; and to focus on making investing simple.
I leave the last words to him: “My ideas are very simple. In investing, you get what you don’t pay for.”
Publication: Business Day (Late Final)
Date: Thursday, January 23, 2019
Page: 7