Morningstar - Q2 2022 - 46

Strategies
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
EXHIBIT 2
Old Vanguard Versus New Vanguard
Bogle may have mutualized Vanguard at its
mid-1970s founding, launched the first retail index
fund, and helped spearhead direct distribution,
but those moves weren't purely altruistic.
Rather, each occurred during his fierce, careerdefining
battle with four Boston-based
rivals who had ousted him from his CEO role
at Wellington Management.6
Thus, competitive motivations coloring Vanguard's
initiatives aren't unprecedented. While I
have raised some concerns about Vanguard's entry
into private equity and the launch of its highconviction
active Advice Select funds elsewhere,
there are also illuminating similarities between
old and new Vanguard.
Indexing and Private Equity
Like private equity today, indexing in the early
1970s was an institutional approach. Bogle
initially pursued it not because he was hoping
to revolutionize the retail world, but because
it was Vanguard's only option. Vanguard
was then a fledgling administrative offshoot
of Wellington, which alone retained investmentmanagement
duties in their relationship.
Bogle, however, argued to his board successfully
(albeit somewhat disingenuously) that
as indexing entailed tracking a benchmark
rather than picking stocks, it was an
" unmanaged " strategy and thus didn't infringe
on Wellington.7
To bring indexing to the masses, Bogle then
had to overcome implementation issues,
an inauspicious 1976 start, and years of lukewarm
Indexing Takes Off Investors flooded into Vanguard's passive vehicles after the
2007-08 global financial crisis.
Estimated
Net Flows
$400B
300
200
100
1,783
-100
1994
1997
2000
Source: Morningstar Direct. Data as of 12/31/2021.
2003
2006
2009
2012
2015
2018 2021
-2,000
Total
Active
Passive
Active
Passive
Net Assets
$8,000B
5,977
6,000
4,000
2,000
interest.8
In fact, it took until the late 1980s
or early 1990s for Bogle himself to transform into
a relentless passive crusader, according to
a former manager of Vanguard 500 Index VFIAX
(initially First Index Investment Trust).9
And
indexing didn't catch fire with the broader
investing public until the global financial crisis'
aftermath, when Vanguard's passive assets
eclipsed its active assets and grew exponentially
thereafter ( EXHIBIT 2 ).
Vanguard is also playing the long game with
private equity. Its initial private equity plans
perished in the aftermath of the dot-com bust, but
those experiences likely informed its early
2020 partnership with fund-of-funds purveyor
HarbourVest, a firm with more than 30 years in the
space. The partnership's stipulations include
an 8% annualized hurdle rate before HarbourVest
makes meaningful money and measured
asset deployment so that investors won't have
6 The Boston four were Robert W. Doran, W. Nicholas Thorndike, Stephen D. Paine, and George Lewis. Dean LeBaron, of early index provider Batterymarch, an acquaintance of Bogle in the
1970s, went so far as to say that the four, not Bogle, " were essentially the founders of Vanguard, because they made him angry enough that he wanted to prove that what they thought
was just the tail of the dog was going to wag the dog. " (Wigglesworth, Trillions, P. 102). See also Slater, R. 1997. John Bogle and the Vanguard Experiment: One Man's Quest to Transform the
Mutual Fund Industry. (Chicago: Irwin), PP. 23-106.
7 Bogle, Stay the Course, P. 40. See also Bogle, Character Counts, P. 7.
8 Transaction costs sank a 1971 attempt to replicate the New York Stock Exchange's 1,500 issues through equal-weighting. Even if a 1973 cap-weighted approach to tracking the S&P 500 proved
tenable, institutional accounts trafficked in large sums that didn't move much. It was thus an open question whether a retail version of the same could work, as dealing with lots of little
accounts and daily flows was more complicated, especially with the limited computing power then available. First Index Investment Trust (later Vanguard 500 Index) raised so little money
in August 1976 that initially it could afford only the S&P 500's largest 200 stocks and an 80-basket sample of the rest. Only after a late 1977 merger with another fund did it have enough money
to buy all of them, and its assets didn't exceed $100 million until 1982. See, respectively: Bernstein, P. L. 1992. Capital Ideas: The Improbable Origins of Modern Wall Street. (New York: Free),
PP. 247-248. Wigglesworth, Trillions, PP. 110-113. Bogle, Stay the Course, PP. 46-47, 58-59.
9 Wigglesworth, Trillions, P. 124. Bogle's transformation into the apostle of retail indexing is even more remarkable considering that in his Wellington days he argued (under a pen name)
on behalf of active management and against the concept of indexing. See Armstrong, J.B. [aka Bogle] 1960. " The Case for Mutual Fund Management. " Financial Analysts Journal, Vol. 16.,
PP. 33-34, 36-38.
46
Morningstar Q2 2022
https://www.morningstar.com/funds/xnas/vfiax/quote
Morningstar - Q2 2022

Table of Contents for the Digital Edition of Morningstar - Q2 2022
