An Avant-garde Reformer

Title: The House that Bogle Build
Author: Lewis Braham
Publisher: Tata McGraw Hill Education Pvt Ltd
Price: Rs 475

There are not many crusaders who champion the rights of individual investors the way John Bogle, founder and now-retired CEO of Vanguard, the largest mutual fund house in the US, does.

In this book, author Lewis Braham, a journalist specialising in personal finance, tells us the story of the inception of Vanguard and how Bogle popularised the low-cost index investing. But this book is not just a praise of the great man: it does not shy away from taking a contrary stance and is in no way a panegyric exercise.

‘Strategy follows structure’ is one of the key concepts championed by Bogle and this idea is best exemplified by Vanguard’s mutualised structure where fund shareholders are the de facto owners. This has enabled it to manage funds at the lowest possible costs and has provided it a competitive edge over its peers. It has also been referred to as the Wal-mart of the fund industry.

Bogle believes that the salutary effects of this structure led to the creation of the first index fund. He still refers to it as the ‘gold standard’. These passively-managed funds are based on long term buy and hold investing which try to generate market returns minus the costs. But on the flip side, it paved the way for the creation of exchange traded funds; speculative trading on these hurts the investor which, in the author’s viewpoint, would turn the index fund into a devil’s invention.

The author also highlights the iconoclastic nature of the self confessed dictator at Vanguard. Bogle lambasted the mutual fund industry for charging management fees that were inversely co-related with fund performance, asset bloating, market timing and misleading marketing of highly specialised funds. He recommended money managers to take on fiduciary responsibilities and remain true to ‘principals’ as well as ‘principles’. In a low cost indexed world at Vanguard, the shareholders could participate in Bogle’s vision of an ownership society as they were entitled to the largest slice of the returns generated.

In the latter part of the book, Braham points out the drawback of Vanguard’s strategy. As its partnership plan is linked to cost savings on funds, the incentive to increase the asset size remains very high. The reason behind the multi manager approach followed by it may be the compulsive drive to keep costs low. But the rationale provided by Bogle for this is to benefit from the skills of different managers as they may perform favourably during different periods.

The book also covers Bogle’s troubled childhood, initial years at Wellington (now Vanguard) and his journey to being the chairman of the largest fund house in US. It also covers the fallout between Bogle and his successor, Jack Brennan, and irreconcilable differences between the two.

Along with all these events, the author gives us an insight into the future of Vanguard and mentions that as long as the founding principles remain intact it would remain the lowest cost provider in the fund industry.

Bogle’s favourite saying ‘press on regardless’ sums up his spirit for life. He has survived many heart attacks (real and the ones caused by being fired from job) and has successfully battled a severe heart ailment. He is still going strong in his early eighties. Though retired, he keeps himself abreast of the events at Vanguard from his office at research centre at its nautical theme based campus.

The book is an interesting biography of the man, known as St. Jack by his followers, whose tryst with mutual funds began when he wrote a thesis titled ‘The Economic Role of the Investment Company’ in Princeton, now revered as the ‘conscience of the fund industry’.