John Bogle on Turnarounds

From its lowly beginning in 1948 with my struggle to absorb his Economics textbook, my association with Paul Samuelson had a wonderful turnaround. While I had hinted at the merit of an index fund in my Princeton thesis (mutual funds “can make no claim to superiority over the market averages”), I ignored that important finding for years. But in mid-1975, I decided that the time was ripe for the world’s first index fund, importantly because of Paul Samuelson’s inspiration. That inspiration came when I read his lead essay in the inaugural edition of The Journal of Portfolio Management (Fall 1974). In his essay, “Challenge to Judgment,” Dr. Samuelson explicitly called for those who disagreed that a passive index would outperform most active managers to produce “brute evidence to the contrary.” (None was forthcoming.) He pleaded “that, at the least, some large foundation set up an in-house portfolio that tracks the S&P 500 Index—for the purpose of setting up a naïve model against which their in-house gunslingers can measure their prowess.” Confronted with his express challenge for somebody, somewhere to start an index fund, I could no longer stand back. It now seemed clear that the newly-formed Vanguard Group (then only a few months old) ought to be “in the vanguard” of this new and logical concept, so strongly supported by the data on past fund performance, and so well accepted in academia but so little acknowledged by fund industry leaders.

funds, on the way to topping 50%. Indexing is an idea whose time has finally come, a disruptive innovation that places the interests of investors ahead of the interests of fund managers. Early Signs of Progress We have a long way to go before corporate governance participation by active money managers and passive index funds reaches full fruition. But the tide is moving strongly in that direction. One encouraging sign is the “Commonsense Corporate Governance Principles,” an open letter from a group of major institutional managers that calls for a focus on “long-term value creation.” Its set of governance principles was developed by a group of giant index fund managers (Vanguard, BlackRock, and State Street) and active money managers with a strong tendency to invest for the long term (including American Funds and T. Rowe Price). Another encouraging sign of greater participation in corporate governance (especially to yours truly!) is the evolution of Vanguard, now the world’s largest index fund manager ($3 trillion) and second largest money manager ($4.5 trillion). The turnaround in the firm’s philosophy has been dramatic. In 2003, Vanguard joined Fidelity in a major public statement opposing even the disclosure of its proxy votes at corporate annual meetings. But by 2012, Vanguard was actively engaging with the managers of its portfolio holdings. Then in 2017, Vanguard came full circle, providing its first formal annual report on “Investment Stewardship.