FOREWORD

The nineteenth-century Scottish philosopher Thomas Carlyle famously argued that “the history of the world is but the biography of great men.” It is a temptingly elegant mental framework that taps into our deep-seated, human need for simple narratives with clear-cut heroes and villains.

After all, this is no archaic prism through which to look at the world. Even today, Hollywood constantly feeds and reinforces our desire for flawed yet brilliant protagonists who single-handedly change the course of history. Even modern-day incarnations of Batman shed the inconvenience of his sidekick Robin. But reality is always somewhat knottier. Knottier, yet more fascinating.

If great people can shape society, then society equally shapes great people. As Karl Marx observed in The Eighteenth Brumaire of Louis Bonaparte, his account of Napoleon’s 1799 coup d’état: “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past.”

And as deeper examinations inevitably reveal, even the most titanic people and their most impressive accomplishments are inevitably the product of countless others that toil in the background. For every Napoleon, there is a Louis-Nicholas Davout or Jean Lannes, generals and marshals who often do the lion’s share of practical empire-building.

The story of Vanguard often begins and ends with Jack Bogle. It is true that the money management giant was born largely through the sheer force of will of its founder, and congenitally injected with a dose of his messianic zeal. But to reduce the story of Vanguard to the story of just one man is deeply misleading.

It is hard to imagine someone better placed to write the true history of Vanguard than Charley Ellis, who combines the intimate knowledge of an insider with the incisive observations of an industry veteran. Some myth busting is the result.

As Ellis points out, Bogle was never shy about elevating the legend of “St. Jack” above the more complex reality. For example, Vanguard’s founder would in later life see a kernel of his index investing proselytizing in his Princeton thesis on mutual funds. But that is quite the stretch if one reads more than Bogle’s curated quotations and recalls that he was an equally ardent promoter of actively managed funds for the first quarter-century of his career.

Zealous Bogleheads—the moniker adopted by fans of Vanguard’s loquacious founder—may bridle at Ellis’s puncturing of some Bogleisms. But others may appreciate a more nuanced view of Vanguard’s journey, whose extraordinary success owed much to Bogle’s incendiary drive, but also to his many able colleagues and successors at the tiller.

Wellington’s independent director Charles Root and Bogle’s able assistant Jim Riepe were vital handmaidens to Vanguard’s birth. The brainy “quant” Jan Twardowski was instrumental in the birth of its first index fund. Although initially an abject failure, it was pivotal in Vanguard becoming something more than a nondescript investment administration outfit. Without John Neff—the fund manager legendary both for the strength and durability of his stock-picking performance—Vanguard may not have survived the early lean years.

Bond chief Ian MacKinnon built up Vanguard’s huge fixed income division, which has been essential to its success. Gus Sauter may have self-deprecatingly called himself the “head of the monkeys,” but his importance to Vanguard’s now-imperious indexing and quantitative investing efforts was enormous. Bill McNabb later steered Vanguard through the storm of the financial crisis with aplomb.

Arguably most importantly of all, Jack Brennan was the yin to Bogle’s yang. The assiduous, publicity-shy Bostonian complemented the visionary, gregarious Philadelphian perfectly, but was also instrumental in many of Vanguard’s most successful grand strategies, such as its mutually beneficial partnership with Primecap. The two men suffered a devastating, emotional fallout toward the end, but, quite simply, without Brennan Vanguard would not have become the disruptive giant it is today. He was Mark Antony to Bogle’s Julius Caesar (or as Bogle later saw it, his Marcus Brutus).

Even this roll-call underestimates the many people who toiled under the mammoth shadow of Bogle to ensure Vanguard’s success, and rarely if ever got the external fame they might have enjoyed at another organization—such as Jeff Molitor, whose steadfast refusal to allow a tech fund at the peak of the dot-com bubble burnished Vanguard’s reputation for investment sobriety and care for clients.

Yet what they all wrought is nothing short of colossal. Even today, the magnitude of Vanguard is often underestimated because of its low-key nature and positioning, both culturally and geographically, on the outskirts of Wall Street and its braggadocious denizens.

At the time of writing, the investment group manages $8 trillion on behalf of over 30 million customers, which range from secretive sovereign wealth funds and sprawling pension plans to ordinary Americans, Australians, and Brits saving a little bit each month for their retirement. That makes it comfortably the second-biggest investment empire in the world, only outdone by BlackRock, which was built through a series of aggressive acquisitions rather than the steady organic growth of Vanguard.

Over the last two decades Vanguard has become synonymous with index funds, which indeed make up $6.2 trillion of its heft. Yet this obscures the fact that Vanguard also manages $1.7 trillion in traditional, actively managed mutual funds. This alone would make the company initially started as a clerical outfit one of the dozen largest asset management firms on the planet.

The central cause of Vanguard’s success is not difficult to spot. Bogle often joked that he wasn’t so sure about the Efficient Markets Hypothesis, Chicago professor Gene Fama’s theory that markets are in practice unbeatable by active fund managers, which underpinned the first generation of index funds. But he was devoted to what he dubbed CMH—the Costs Matter Hypothesis—and helped hardwire it into Vanguard’s DNA, both through its unique ownership structure and through the spartan example he himself continually set.

Today, Vanguard’s innate frugality even shines through in its physical headquarters. Although the investment company is today so big and successful it has transformed the surrounding townships—entire business hotels exist around Malvern virtually solely to cater to Vanguard-associated visitors—the “ships” where its staff toil are dowdy compared to even third-tier Wall Street firms.

More pertinently, low costs mean that Vanguard can continually undercut rivals, whether in index or active funds. Weighted by assets, the current average expense ratio of Vanguard is just 0.09 per cent. In contrast, the industrywide average for traditional, actively managed mutual funds is about seven times higher, according to Morningstar.

In practice, being so much cheaper than virtually every one of its rivals—who have shareholders to please, who demand a certain profit margin and dividends—is for its clients the investing equivalent to beginning every soccer game a goal up on your opponents.

The advantage is particularly stark for dirt-cheap passive funds. S&P Dow Jones Indices, the benchmark provider, estimates that equity index funds as a whole have saved American investors a cumulative $365 billion in management fees since the mid-1990s. A large chunk of that is attributable directly to Vanguard. And even that ignores the de facto gains derived from index funds beating the vast majority of active funds over that time period.

Cheapness has periodically cost Vanguard’s clients in terms of technical glitches and frustrations, caused by overly modest investments in technology over the years. But there are few signs that the occasional annoyances have impacted Vanguard’s upward trajectory, and in 2020 the company inked a huge partnership deal with Indian IT giant Infosys that could transform its reputation as a technological laggard. Rivals will be watching carefully.

Nonetheless, great success—and the overwhelming prospect of more to come—raises many questions.

BlackRock is a global giant, but in the US mutual fund industry Vanguard is utterly dominant. It controls over a quarter of the domestic market share, almost as much as Fidelity, BlackRock, and Capital Group combined. Is there a point where Vanguard’s success becomes problematic from a societal perspective? Can dominance—although well-earned and a boon to clients—at some point somehow become unhealthy and even harmful?

This is a question Bogle wrestled with in his last days as well. Although he scoffed at many of the theories lobbed out by academic and traditional investment groups about the vagaries of index funds, he admitted disquiet about the “reality that the indexing sector itself has many of the characteristics of an oligopoly.” Although a rare oligopoly with seemingly positive results for consumers, the likelihood of this concentration only deepening in the coming years was not necessarily in the “national interest,” as Bogle put it.

Of course, this needs to be seen in light of how Bogle spent his later years burnishing his own reputation even if it meant flinging some rocks at the company he founded. But he is not wrong. Vanguard’s ballooning size will inevitably start dragging it into some of our age’s most contentious issues. Ellis rightly notes—and backs it up with copious examples—that Vanguard is dedicated to “doing the right thing.” But the reality is that the right thing is often in the eye of the beholder, and many issues are becoming increasingly polarized.

For example, some of the company’s clients may think it should do its utmost to pressure energy companies to halt exploration—perhaps even some production—to ameliorate the climate crisis. In fact, they may think it has a fiduciary duty to do so, given that global warming could unleash a socioeconomic cataclysm. Other clients may think this preposterous, insist that Vanguard should support companies that are producing the essential ingredient of virtually all economic activity, and argue that it only has a fiduciary duty to maximize returns.

Even King Solomon would struggle to reconcile many of these conflicting and politically touchy arguments. Threading the balance between being an overly passive and active shareholder is likely to be one of the defining challenges for Vanguard for the next few decades.

Nonetheless, such is the curse of success. Vanguard is today one of the financial world’s most consequential companies, and its future looks even brighter than its vibrant past, thanks to several ambitious, strategic gambits launched in recent years.

Vanguard has now set its sights on doing for the expensive and often substandard industry of financial advice what it did for investment management. Vanguard’s Personal Advisor Service—which was launched by Brennan’s successor Bill McNabb in 2015—already manages $243 billion.

Under Tim Buckley, now Vanguard’s latest chief executive, the latest initiative is a move into private equity, through a partnership with HarbourVest. Although seemingly anathema to the company’s mantra on the importance of cheap fees and transparency—concepts not commonly associated with the private equity industry—this is potentially another crucial plank in its advice and retirement business. And who knows, maybe Vanguard is quietly plotting to eventually bring the private equity phenomenon to the masses? Now that would be a revolution.

So, grab a bottle of cheap Cabernet Sauvignon—Bogle’s favorite wine—and settle in to read Ellis’s fascinating and fleshed-out tale of the Vanguard journey.

Robin Wigglesworth

Global finance correspondent, Financial Times