John Bogle and the Vanguard Experiment: One Man's Quest to Transform the Mutual Fund Industry

284 Pages·1996·61.95 MB·English

by  Robert Slater

JOHN BOGLE
AND THE VANGUARD
EXPERIMENT

One Man’s Quest to Transform
the Mutual Fund Industry

Robert Slater
AEF ies Mier
ME ghee tacation Group
Acknowledgments

Le ADL lus John Bogle cu the Vanguard Bsperinants One
Months Qnest 9 Trunsiorm the Mail Fed Indice
fiom Toba C, Uscky Rg the fonder a fhe Vanguard Group,
ft lnyesimsnr Companies, He favored such apinjoc a « way
fF polling together tho corparats hissory oF this remarkable

uteri aed provid au oudaly wea ap ef his uw: plilosupliy sud

‘efrs “br fname gensratians Bogle relishes his mle ae “earseiance oF the

moma rin iahisy” and pices hums” an rounding. Vanguerd and!
ic ima one of 22 aatiqn's mast rsmarkable business one

AS ho neared reiomet, he Was Feady ta cooperate wth a Book

‘ha weld delice in the nique, campeling, and coneayssial woe of

eed. Beale prio ida tp the publisher af his momal ed guid,

‘or Mose! Foes, Inia Professional Publishing, zhigh happens

1 he my publisher aswell, Happy tor ma, Inin asks me 4 rake an

the assgninent,

Tyas pleased 19 inmerse-
Wile wersing on previons bnsiness bank pinjees. I had epme 19
pprestare the face that ning the TWKDs and Ue mili of Arnercans|
has hocome players” hawevsr lags. ama, ihe mut} faa indy

An yor whl the indhstey was ee Ftoslgewing segment a American

Inasness, ras als ane cf the last seruniza, Ievesors il pty

gost dea of ths varios kinds of mute Aa, Ht He ad

‘itn furd companies, how ey opera
thay 990, and what ther philasaphies and steel
“The more that Aseria ‘ist inna! “ne eo

1 in this su

pavies, the more erusial
“A bouk un Jack Mople azul Vupuanl, ieefure, nae lol of sense ty
tte, Ths few uber lind wait suet aad Send personales stick
tas as on ate stony ae Jour Boge ced the Feng Experiment
Bovks ou the aul lua Geld eal, of couse, Wut they have Fosse
lust exclusively vit the alviveiving side. expliing saa! anu
Jinls we wal piviag supgestivas about the bet! sestegies when investing
Jn glu Sas. Wha. sls this book apuets Dat ts We rst auusiced
inside look at a major munis! fund company

When] met Jack Bugle for he Gist une in bis oie at Vanguard's
hewdqutiers i Malveru. Peunsylvonis, ve agreed Us dhe project would
emi. a uot Vanyoaues tt iso sey, tat T would exjuy ee ead
in weltng whee I saw ft ta vais, by inshodiag whatever material I
‘dgomelimpavtane and omining whatever hough ierclevant ae nines
esting. As ito underline the independence I yuu euley in seseorcing
the Doub, Bugle paznitd ax lo pause Ws lu uf eouldestal dace,
ics dating back tos fonading oF he campaay in 1875, documents
tna portrayed a whale areay of Vanguaed porsonsl es, ichaing Beg,
somesines ina negative light, Las ase ae ta inzeviowe Relea Leng
about the ust uupleasia, paiod of his caevt, his Uamissal ay head uf
1Wetlingson Management Compang in cory 1934, an event he has never
spoken ahont i publi wai a was abe iateview thor paaticipasts
i has evoat as ll, In sllasing me all cen, ge aranged far me te
interview the Poa spesslist, Dr, Bernert Law, whe syed is haser
ailment “era mumber at years, Lovin's eandor in diseussing the precise
oss af Ropls's Hears consign helped me to rope as ane af His me
povats paris of ogo’ ti

“Mos: mporsant Jack Bole promised thar eal hae aseese chim
‘We did ret cigenseat one "est mest hows meh ime he would give me,
2 fecumed cut, | conducted 30 hove ya him apread avr
4 sing-mcnch period {Rohruary 4a Newer 1995}. In aiditin, Bele
Ine sore that ha access to a8 many of Vangand’s emplnyses |
seished t9 fervie, anahafing hs cop eveeuves, | a alan able 9 alk
1 Vaaguand boaed stembets, pas and prsscne_ Ans x gauge Wanguarcs
ropation sikin shy anal tnd indoste, Vspoke with a umber of
sndhsty Toadees a well as nasi espe

| ara indehace to a aursher af peopl, hoth at Vancuard and ele
fiw giving of ehsin time gonoroay for rh of this hea
Fiesta forest, to Jack Mole, We eel in diffeneat pices soe
limes al his office at Vanguard beadeuarters: sometzees at his sunutes
hous i Like Pacis, New York Wy lid loug ghioue vourusaions #3
swell, seuae ot tea wile he way a Pid spa ala sa
tensa

“My sess spraned ous of te sist aud mast shelling ptivds
Jur Boyle including tie anmouaceaneal of is elinanent ia Mw 1995,
tutning over the Lexdership to Taek Brennan, end subsequent. Bopk’s
say id hoe tneaplat wand, Thoupin Bugle’s tne was Lael be
leeiled Ms bouk 18 Wp privity. la ruy previows buvk prviecs, Vave
aly beeuable to seuss bow pert uty pujce! vaso Ux pason abou
‘whom T vas vaiting: in the case of this book. I eould fe! and see how
Jarge a povty ir as For Bogle. Thar kaossledge gave ms an even great
seuise uf rspouuibiity wa Day best job pursible

Ts to give special Usake to Tavis Buctai, las ix uly 1996
Inscame Fangnte’s now chit exeemivs ogee, For anus oF years
FBogle's heweapharens, Breanaa gated me a numer 0” lengthy in
iow his insights have hoon pattenlaly soto 19 ate and Have hel
lw slape this buoh ia uaa ways, Aad Tat fo capes aay axe Ia
{Water T. Morgan, vio founded she Waingron azganizarin, Vanguard

inthe Ins 19204, and whe eontines ta wer at his of
‘Vanguard headquartrs af ths age of 87. met with Morgan on a mmbor
fr aecasions and ‘saracta pond deal shoo: the carly days oF Wellingron
88 well as af tho entire smnun! fond industry

ins Nomis, Jack Bogle’ edn impovian role in this
ho, selding 19 oy understanding af Vanghaed considerahiy and provide
sng me with # canting streare of Bets
1p him,

Talgo wane ta express my giants the ater poople I interviewed
hah inside and outskls 0 Vangnard. They ate: Poss Rerasci, John C
Fogle, In, Mike Brescera, Rabore W. Dara, Feomy Gi. Da
thow Fink, Rienard Fonsi, Philip J. ina, lon S. Fossel, Jan
‘ames H, Gasly, Nick Giangilia, T, Chandler Harvick, Raehaea

, abn. Jacksoo, Rayniard J. Klapinsky. A. Misha! Lipper

ewond, Rerand Losin, Peter yneh lan A. NlneKinnon,

Barton G. Malkiel, Kenesth G. Mamn, Bran S. Mazes. F Walla

MoNah Il, Durean M1 del,
an Fils, John B

1D. Rost, Paul Sarmlson, Gonege
flu JF, Shera, David Silver, Slat Swalda itDosedowski, Kaen
E. Wert, Ache Zekel, Daniel P. Wiser, aad Dexa G. Wluore. Talks
‘vis to thaak dhe countless tiers wl hep to explain Vangie to ane
ring uty visits Ty is bewquastes, especially Viekiv Lendutsst. Euily
Super. aud Lessor Silver

Vusious (els au) femily meibers provided ane weil: moral sa
wller support during the ering of this book, Tisy anv: Tach ad Bes
Sister, Roslyn and Judd Winisk, Michae] and) Bobbi Winick, Mitchel
Sloterand Les Dickstein, Mel aud Aut Lsvtuer, aud ean Mas. em
ak su

Tvs blessed with otf elitr Juss buck: Aus Gat, te
Exoeutive Editor at lin Puossioual Publishing. She aot oaly bought
hor cans iftahle knowledge af Vanguard and the mal Kd inde 16
ur project, but alse vauiged ine ongoing dinlegue with axe swat Ie
subject safle as fart of He proces of improving the muawsezpl. Hea
faving tats ane in ayant avsence aheyghont the pak an Trans her
‘oe mh, Taso vai c9 shank Jeticy Krams, Reito-in-Chist a nein
Professional Publishing, wha urged ta me writs This honk an wha rade
i possi

Thay Far, avery waem hank you, Te my wife Flin, my cildeon
“iviam, Shimi, Adam, and Rachsl aad ta my grands Fal, am grate
for all the help and soppore I eocived ie siting, this hoak

Rohert Slater
Introduction

fous ¢, BOLE, 3 Tover uf ullary, aul, ad vistion hissy
Tas tka pti aay bales of Lis woe Wubi is Le
Same Have bson persone. peisslany a serie af
hoae azaaks, ethers hays been om te fick at busines, inching
tho llyted merger he enginestod hewscn his nas Fans Ti,
Wellingiou Manageuteat Conpiaay hich Bogle lsu bouu selected ta
Tend by is foneder, Walter T. Bloygan and 4 high-aetieving, Boston
invesonsni-canngoling Ham, whose purtnors eventually woold une @
success! campaign to firs him fam his posta Weiliegsn’s peesidom
ane CRO,

Foy Tack: ogle, the hares ia ihc ha Das engaged ae, more oon
‘nan net, sndod winemphantly Despite the glonmyagnascs of hs many
and alegists who reaed him theaughont his lif, Bogie was ll eiving
8 yoars mer is frst heart fain, Plowing his ose" Frm Wellington
“Managemnt Comping, Bogle moved mt fod Tre Vanguard Gina
ft Inyeument Comiganies al built ne a powserhnnse with es
in dhe mumet fond industry, Mest immpastan” ofall, Bogle Ind numerous
ors, many’ af ther aiszestl ted what he ai? ae the overall sre
fr the mitual And indus, ts sccessive clares of investment manig=
mont supeest, and its fk af eandar in adkeasing and marketing

(Gn May 8, 1995, hon Bogle med i, ns desided it was time 3
‘nim Vangnants reins avor tthe nost goneiaton, Medically speaking
Fogle ws walking miacls. When ho <ufered fie fst her: stack 9

1, his eardinlogitsbotioved he would nnelive w 23240; Boe
4 hicma:s aptsts, nl tional Hat he doubted hs wuld make 30. Na
soryizingly. at Feast n those who knew him he fis the at, less
hy awhot ners called ths Jack Ragle Factr—an ante
lw sure, Noueeless. Belle ial lage eonsideved the ay seen bis
Dbusiues creer woul el sd fe wuld au Iaager espuat fo Uae wlive bo
‘ura a cae, be ke el, Fraga’ xls, At aune
ia, it saccade Ua at a yal a Huger be ble to allege
his colleqyaes af iter saul and companies su Lerveuly in his ques
tsa Me eta Fu iahsty

‘hs Bogle eouiavd his duvision uver Ie neal fee days. le hae be
‘wanted o assume 9 erctly diminishes rele in Vanguard's leadership only
when Vangel was ins strony a pasion as possible. ane te lie 35
Figll, As Vaaguane appuovcael its 200s anniversary. i oats eying its
sl pear eve sso aude mmusggeunal gas SLA bile al Uae
finm’s iacepuen supassed $150 billion oa Mey 16, 1995. mabing
‘Vanguard the sesand largest mumal fonl company in the United Sees,
Dbliad Fidelity lavestautts. lade Lunds, loug seomsel by the dost
Toa Tilly gue usin aeptauee. cud he i vow prising Boe
fr intaing inde Ts av the istry and shamgning te eanse
Final

a
For the pac tn decades, Bogle had eon Hie deminant ins
hing eno of the lergest and mest speeessil mutual fund cempaeies
nthe word, He was an incising prosene> in sho company, and while
ho snug conasel an iscned othe advioe a is ascaates, ts eaepany
‘wa an demoermsy, Inthe en, i as usally his yan tha saa
Seema isu tn wer Rr ad if his eg made is
his crew merahers gave histor full suppaet—nor simply ost af aly,
ht bocase he vas right about so mans things so rach ase time. And
hing eights na climate af unprecedoate bill aarti ocks and bard,
he presi over kang, peried ef praspatty at Vanguatd, White al of the
Hn ends te nny re tri
fiw thoi starznners and po
‘Thus, as Bogle prepared to Tears she areas h> loved 30 ach, the
ramet yas biersiost. Floysn days ater his ft hithday, he walks
tno the hourdraom st Wangunrs news headgiaers in Walser, Ponasy
arta, and anon
he wished to ep dan a8 chi sccousive affier efectve January 3
1946, bu with the hoards consort cu Hike #9 reregin x5 chairman
‘Rogle futher announced shat he planed ta nominate his he paren
‘hn. Brennan, to secced im ash). I abil gave hin no persue
cr, a be itssed that he mel “St

‘er the inleess of shareholders sad

seri involved i invssuue poly. wail sual repo
ut ix public ou ssc dolier issues.”

Touncled Wazyoand in 1975, he ofleneeferzed ty it as the
Vanguard eaperiment [is yoo! su to estiblish & zeutal usd cusspane
tha ss Hae to wes in Ue idstey Until Bogle cua akg. the eat
veetienal mums! fad company emplayed a aausgement company to
eet the stiles of is rata Laas, ig akinisetion. Uist
Dutivn. and invesionen! vonseliny services, Bugle. om the uther has
enue Iu Ueliose Das sanelsees wou being salsa wale sch
system, ad tat dey would be eared ely only ifpowat wecetakea fom
thy management comaany and yYaeed diterly in shy hands nt sho ind
pesaeul dueotus sod sberchules uf Ute Lunds.

By scckiay ly have Wellinglou Masapemont Compsuy Vangucad's
pledocossay linguists neae-tin ego oxer is val tas, Bogle

fof an experiment that a Fst seemed ta have Title chance at
sueoess, He got his chaacs 28 pat his plan into acrion whoa Wellington
Jed Mie a 1974. Ua the woe of Ue shvaises san) Wad Wood Us
surrounded Wis sismissal tom Belington Management Campany’ Bogle
hia new anual Fuad sompeny based an his vaconversiaagl model It
‘would bo the Ties ime anyans in chores ata momal Fund compeny ad
challenged te sans gp, tht is, the Holi thar management cempanies|
Aosorved 2 reap enemenis profits a he expense of their fod ineesors
"Bur sonteoversal at was, Bogle"s cancaatin af the pertact mamal Hand
sompany became ¢ reli

A he prepared ro stp davin 98 hots oftcer of Vang
‘Bogle was pr thar she Vanguard -epvimeonrhad come sa far: Vangnae
‘was tho largest pure no lead mobial Td ganization isthe aor and
4 domivanr player in what bad heoame 9 $2.8 cfm iachsty. Quite
ira al finds 48 re sway many meron p=
wide fr tev fa ‘sey neh they thou ahoue inset
ang the isancia! makers, Rope, however, fl lingering sense of di
peainimeat an trystation hae his hyper dteam—to ans the mana
fet indus inte Vanguanl'simags—hod yet 10 he eali73,

While the insestry had changed somowhae aa a result af hie
prechings—heonming aware of ens nmipeion, conde hate
ng with fond stare ders ofthe ecenornies at sca har Wore geno
enermnus ofits ne managemenecorapaniss andiseginning wx

{nes sente of eardor and responsiainy—Hing e soll 8 ot se
‘Alera, Vanguard reser deamost pa Kees wil follows
Bogle believed tha waly when rautual lund voupanies Uberaled thea
selves rum their usujgeaet coupponies would He interests of ana
Jina) slivchuhas uly costs Zest, He opnistivally oot Us this
resirucloring would wees sein the text 23 5

Tad Bovle bea misur player the industry is eulleggues atthe
Jinas, whu were vaing buge pris fou the sistus quo. could Dave
Aismissed is jxemals. To however, Vanguaisas too much
fa presence in the insti for Bugle be easily dismissed is curspans
hha become 4 betlunusk, sa iadusty slundard x au differen! level,
Jou ils umscule expense ratios. we Mw eae of the destaipivus of is
imal sotuas snd ssks in anaval reports ¢ de investment aevomplish
mons of is emtoal Finds Infood, ia mid-1995, Vangnatd wae intone
Jnghy regard as Hae muerte el fst Fd i a iasy, 2
sol, Boyle's cues ta set ta aul dad dis as sui ign
fr scons, any when she Tees Vangnard clanes appeared would oats
scknersledge that the Vanguaedl expeeimert has tly seceded.

This honk isthe stoey af Jack Ragh—a man hoth resored and ro
led) aus dae Vauguced experiment, is quest we isesToan ch ants
fiona insry