W***n
发帖数: 11530 | 1 How Index Funds Prevailed
Sep 6, 2016 3:52 PM EDT
By
Stephen Mihm
Forty years ago last week, Vanguard’s John Bogle created the first index
mutual fund, offering investors a guarantee: They would never outperform the
market, but nor would they underperform it. The Index Investment Trust (now
the Vanguard 500 Index Fund) simply tracked the performance of the S&P 500.
Index funds are now a huge business, accounting for trillions of dollars of
mutual fund money. And with good reason: Even though their returns are
utterly average, their minimal fees bring big savings for investors,
allowing them to outperform actively managed funds over the long term.
Bogle deserves a huge amount of credit for this. But as he has acknowledged,
the real story of index funds begins far earlier than Vanguard’s entry
into the retail market in 1976.
The idea of an index fund appeared in 1960, when the University of
California economist Edward Renshaw co-authored a paper, “The Case for an
Unmanaged Investment Company,” with an MBA student, Paul Feldstein, for the
Financial Analysts Journal. It anticipated many of the ideas that would
animate the first index funds.
Renshaw and Feldstein examined the investment landscape and noted that the
number of mutual fund options was growing at a staggering rate. Yet many of
these funds, they observed, failed to outperform the Dow Jones Industrial
Average. Given that retail investors were ill-equipped to determine which
actively managed fund would do better than average, why not just aim for
average?
Moreover, they noted, “real economies in supervision could be obtained by
eliminating the cost of advisory service.” In time, this could translate to
superior returns over actively managed stock portfolios. In a few short
pages, they laid out a clear case for an unmanaged stock fund that tracked
an index.
And no one listened. Well, almost no one. As my fellow Bloomberg View
columnist Justin Fox recounted in "The Myth of the Rational Market," a few
months after the Renshaw and Feldstein article, another article appeared in
the same journal titled “The Case for Mutual Fund Management.” The “
unmanaged fund,” the author sniffed, might “superficially appear” to be a
sophisticated idea, but it was doomed to fail, given the technical
obstacles to tracking an index in real time – it was hard to do without
incurring significant transaction costs.
The author of this attack was one John B. Armstrong. But this was a
pseudonym. Armstrong’s real name was John C. Bogle, then working for the
actively managed Wellington Fund.
Despite the attack, the idea continued to draw interest. It was pursued by
John Andrew “Mac” McQuown, a mechanical engineer who was among the first
to harness computers to crunch data on stocks. He ended up working at Wells
Fargo in the 1960s, heading up the “Investment Decision Making Project.”
His group attracted a coterie of renegade financial theorists associated
directly or indirectly with the University of Chicago. They included Eugene
Fama, who first articulated the Efficient Markets Hypothesis; as well as
Robert Merton, Fischer Black and Myron Scholes, who revolutionized options
pricing.
This group eventually undertook a study of pension fund performance that led
McQuown to consider whether there was a way to create a passive fund that
simply mimicked the market. Yet as the index fund concept took shape, it
attracted enormous controversy within Wells Fargo. In an interview published
by the University of Chicago, McQuown recalled one skeptic who said: “This
cannot possibly be right. We spend all this money on analysts and all this
fancy stuff and you’re saying that all we really need to do is buy the S&P
500?”
As McQuown’s team hammered out ways of tracking the index without incurring
heavy fees, another University of Chicago professor, Keith Shwayder,
approached the team at Wells Fargo in the hopes they could create a
portfolio that tracked the entire market. This wasn’t academic: Shwayder
was part of the family that owned Samsonite Luggage, and he wanted to put $6
million of the company’s pension assets in a new index fund.
This was 1971. At first, the team at Wells Fargo crafted a fund that tracked
all stocks traded on the New York Stock Exchange. This proved impractical -
- “a nightmare,” one team member later recalled -- and eventually they
created a fund that simply tracked the Standard & Poor's 500. Two other
institutional index funds popped up around this time: Batterymarch Financial
Management; American National Bank. These other companies helped promote
the idea of sampling: holding a selection of representative stocks in a
particular index rather than every single stock.
These early ventures met with success, attracting new institutional
investors. One of the biggest converts was AT&T. It company ran extensive
reviews of its pension fund managers, and found that only 20 percent of them
outperformed the S&P 500. This revelation prompted them to shift $120
million into the three existing index funds. At the same time, Ford and
Exxon began shifting money into internal index funds that these corporations
created and administered.
The rise of the index funds started to stir fears on Wall Street. One
unnamed securities analyst working for a Boston bank was quoted in November
1975: “I hope the damn things fail because if they don’t, it’s going to
mean the jobs of a lot of good analysts and portfolio men.”
But at this point, ordinary investors had no access to index funds, and the
threat still seemed minimal. The following August, the economist Paul
Samuelson wrote an article in Newsweek lamenting that retail investors had
no access to index funds. He was hopeful nonetheless: “I suspect the future
will bring such new and convenient instrumentalities.”
The future arrived two weeks later, when John Bogle formally launched
Vanguard’s index fund. And things have never been the same.
This column does not necessarily reflect the opinion of the editorial board
or Bloomberg LP and its owners.
To contact the author of this story:
Stephen Mihm at [email protected]/* */
To contact the editor responsible for this story:
Max Berley at [email protected]/* */ |
|
