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Friday 18 January 2019

TORTOISE TAKE

Earning respect

Millions of ordinary families owe a huge debt to Jack Bogle, a man who showed Gordon Gekko is not the only role model in finance

You may not have heard of Jack Bogle. He never attained the fame of Warren Buffett, say. He certainly never acquired the wealth. But he died this week leaving a far grander legacy: for millions of ordinary families he reinvented what it is to save up.

In 1951, Bogle wrote a thesis at Princeton which made a few points about funds where savers might park their money. To start, you cannot rely on clever stock-picking: “Funds can make no claim to superiority over the market averages.” Investors should think about tracking the market, rather than trying to beat it.

In 1975 this insight became a business proposition: he launched a fund that would just mechanically buy and hold a basket of stocks mirroring the S&P 500 index. It started as a flop, raising a paltry initial $11 million. Who only wants an average fund when so many promise so much more?

But, these days, the fund now known as Vanguard 500 is a $400 billion leviathan. It and other so-called index funds account for $10 trillion of investments.

Part of the reason why it worked so well is that Bogle had another trick: index funds can be run cheaply – and that dovetails with another principle from the young Bogle’s thesis: “Future growth can be maximised by reducing . . . fees” charged to savers.

This sounds banal but the magic of compounding makes it a searing critique of modern finance. A dollar taken from an investor’s savings is a dollar that is not being reinvested for that customer, so it creates a cascade of losses in future years. Invest at 6 per cent for 20 years, and you triple your money. But a 2 per cent investment fee would mean you only double it.

This pair of insights made an unassailable business case. But Bogle’s pursuit of the conclusions of that university thesis required a moral core. Fees on savings are one of the surest ways in the modern world to make obscene money. Bogle eschewed them.

As Buffett himself wrote: “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.”

There are issues with index funds: they mechanically invest in companies that do well on the stock market – but express no moral compass. They are also disengaged shareholders in a world which already has too many of them.

But capitalism would not be under such attack if there were more modest, decent people like Jack Bogle leading it.