“Uneasy lies the head that wears a crown”: A Conversation with Jack Bogle

On January 8, 2018, I interviewed John C. (Jack) Bogle, the founder of Vanguard, the largest manager of U.S. index funds and the second largest investment management organization in the world. Bogle, born in 1929, founded Vanguard in 1974 and launched the first index mutual fund, designed to track the S&P 500, in 1975. He served as chairman and CEO of Vanguard until 1996 and senior chairman until 2000. He now runs the Bogle Financial Markets Research Center and remains actively engaged in the investment industry.

Jack Bogle’s early years and the first index fund

Let’s begin at the beginning, not of your life but of the index fund revolution, which I date to Bill Sharpe’s 1964 article on the Capital Asset Pricing Model. A few years after that, you began to set up a firm that had an index fund at its core. What were you thinking? What evidence did you have that anybody would want it, and what were the steps by which you came to where you are now?

I talked about the idea of an index fund in my senior thesis at Princeton in 1951. The idea had always intrigued me, but I had never thought about following up much with it. But I did point out, at that time, that mutual funds can make no claim to superiority over the market averages. If my involvement with index funds began anywhere, it began there.

When did you begin to implement the idea?

A couple of decades after Princeton, there I was in mid-career at Wellington Management with the index fund idea going nowhere in an industry that doesn’t innovate very much. I was fired as Wellington’s CEO in 1974. A few months later, I created Vanguard. After a long struggle, Vanguard finally succeeded in making its funds independent of Wellington Management Company, which was at that time the manager of its funds. The key to launching an index fund was in the Vanguard structure. We created a novel, truly mutual structure in which the fund manager would be owned by its fund shareholders, rather than by insider executives or outside stockholders. Because Vanguard’s interests are closely aligned with those of our fund shareholders, we were interested in seeking fee reductions rather than higher fees and higher revenues. The whole idea was to reduce fees, not maintain or increase them. In those early years, we reduced the fees paid by our funds some 205 times.

We also made the fee reductions prospective, so they would only apply to assets not yet gathered. Therefore, the negotiations with Wellington Management Company were not very difficult. We would say, “let’s reduce the fee to 15 basis points on fund assets over $10 billion.” When you do that on a fund that manages $500 million, no one much cares.

The idea of a fee reduction led, all of a sudden, to the idea of a fund that would pay no fees whatsoever. If you have a mutual company, this is something you want to do. As with a crime, you need both the opportunity and the motive; everybody had the opportunity, but we alone had both the opportunity and the motive to start what was, in fact, the first index mutual fund.

At that time, of course, there was a lot of activity surrounding recent academic advances, including the idea of an index fund. We are all familiar with the work that was being done at Wells Fargo on behalf of the Samsonite pension plan.