Jack Bogle first claimed active funds did not perform better than the market average in 1951, and it is an argument that has held water for 65 years, despite solid media and investor fascination with active managers and their favourite stock picks.
John Bogle, Founder of Vanguard.
In a new interview with Bloomberg, the investing legend – and founder of Vanguard – said he had seen no evidence of an active fund outperforming the first index fund he created in 1976. Vanguard has since gathered $3.5tn in assets, most of which is parked in index-tracking funds.
“What’s clear is we’re in the middle of a revolution caused by indexing,” he told Bloomberg.
“It’s reshaping Wall Street, it’s reshaping the mutual fund industry. And it’s doing something very simple: shifting the allocation of stock market returns away from Wall Street and toward Main Street. We’re beyond the beginning, but nowhere near the end.”
His comments came shortly after a Sanford C Bernstein note, claiming passive investing was “worse than Marxism”, went viral among financial industry circles.
But he denied that there was any real backlash against indexing, and dismissed the article as “sensationalist”. He insisted that people will be using more index funds in 2025 than today, and that active funds have been losing out to index funds in terms of cash flows for eight consecutive years.
“Anyway, indexing ultimately proved to be a fantastic idea—in part because it’s very difficult for investors to get disappointed in it,” he said.
Aside from the majority of active funds failing to beat the Dow Jones Industrial Average, as Bogle found when studying his thesis before the days of computers, another reason investors are flocking to passive funds are the relatively low fees.
Morningstar found that the asset-weighted, average ongoing charge for active share classes in the UK had barely come down over time, sticking at around 1.6% for the last decade, while index-fund charges had fallen from 0.70% to less than 0.30% in the same period.
While some critics argue that markets would cease to function if index funds swamp assets, Bogle said indexing was only at 10 to 15% of assets in 2016 – but could “easily” get to 50%. As indexing increases, he explained that turnover in the market would decrease, which was not necessarily a bad thing for main street investors.
“We don’t need all that turnover, but we have a brokerage business in which turnover generates the returns that the brokerage business earns,” he explained.
One potential worry about growing index funds according to Bogle, however, was overconcentration. ETFs often hold fairly concentrated positions while a mutual fund, by contrast, cannot own more than 10% of a stock of any company, according to the Investment Company Act of 1940.
When it came to asset allocation decisions, he warned that the stock market was not cheap, and investors should be “fairly conservative” even during what he described as an era of much lower returns.