Jack Bogle is often referred to as the ‘King’ of index funds as he found the path breaking Vanguard Group in 1974. Such is the great man’s repute that even Warren Buffett wrote in his praise recently, “If a statue is ever erected to honor the person who has done the most for American investors, the hands- down choice should be Jack Bogle.” In recognition of his work, Fortune magazine named him as one of the four ‘Investment Giants of the 20th Century,’ alongside Warren Buffett, Peter Lynch and George Soros in 1999. What was the idea behind index fund investing?
Jack Bogle based the concept of index fund investing on the premise that, in the long-term, it would not be possible to achieve returns superior than the market, after taking into account the costs associated with actively managed funds. His idea was that instead of trying to beat the market and charging high costs, the index fund would mimic the index performance over the long run — thus achieving higher returns with lower costs.
In a letter to shareholders, Warren Buffett wrote earlier this year, “For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.”
The Vanguard index has given a compound annual growth rate (CAGR) of 7% since its inception, while the GDP growth in the US rose 2.7% per year between 1976 and 2016. As of June 30th 2017, the Vanguard fund had $4.4 trillion assets under management.
Jack Bogle is often quoted as saying, “Fund investors are confident that they can easily select superior fund managers. They are wrong.” Active versus passive investing has always been a raging debate in the investment community globally. According to Warren Buffett’s estimate, an average investor wasted more than $100 billion on high-fee Wall Street money managers over the past 10 years. In the United States alone, a little more than one-third of all assets are invested in passive funds. Many investors are shifting to passive funds as according to a Bloomberg news report, in the first half of 2017, flows out of active and into passive funds reached nearly $500 billion in the United States.
A study published by S&P Dow Jones Indices showed that about 90 percent of active stock managers failed to beat their index targets over the previous one-year, five-year and 10-year periods. The high fees charged by the managers explain a significant part of the underperformance, as it eats into the returns of the funds.