Moneywise’s Edmund Greaves looks back on the legacy of John Clifton Bogle, tracker fund pioneer and founder of Vanguard, which has several funds in the Moneywise First 50 Funds for beginners
John C. Bogle, better known as Jack, is widely credited as the ‘father of the tracker fund’. He died, aged 89, on 16 January this year.
Although perhaps not as widely known in the UK as in the US, the impact of Mr Bogle on modern investing has been profound.
The tracker fund
In the early 1970s there was no such thing as a tracker fund.
If, as a private investor, you wished to have a stake in markets that didn’t involve the risky approach of buying individual company shares, then the only option was an actively managed investment fund or trust. These rely on fund managers to pick a selection of company shares and bonds to invest in on your behalf – a good option for many, but one that costs.
Mr Bogle changed all this.
The tracker fund is a simple concept. Instead of a fund manager being paid a hefty salary to try to beat indices such as the FTSE 100 or S&P 500, a tracker fund invests in all the constituent parts of the nominated index, with the goal of matching its performance.
Mr Bogle describes the rationale in his 2007 book, The Little Book of Common Sense Investing: “Don’t look for the needle in the haystack. Just buy the haystack.”
Mr Bogle’s aim was for funds to operate independently from asset management firms, in a way that would benefit shareholders.
He introduced the world’s first index tracker – the aptly named ‘First Index Investment Trust’ – in 1976. It was criticised as “un-American” and “a sure path to mediocrity,” gathering just $11 million in the first round of funding.
Today the fund is called the Vanguard 500 Index and holds more than $441 billion in assets under management. Furthermore, Mr Bogle's approach is now so popular that nearly all large asset management firms offering index tracker funds to customers.
Passive beats active
Core to the concept of the tracker fund is the idea that investing can be carried out cheaply and efficiently.
A recent study by the European Securities and Markets Authority (ESMA) found that while active funds have a slightly higher ‘gross’ performance, index tracker funds matched their growth once fees are considered.
Index funds can be easier to choose than active funds because you don’t have to consider the fund manager or relative performance; you simply pick an index you would like to track.
The performance of active funds studied by ESMA was an average, which means for every five active funds that outperformed an index, five other funds underperformed. It is possible for an investor, therefore, to pick a loser fund just as easily as a winner.
In effect, the tracker removes the risk of a manager who might make poor decisions and cost the investor capital growth or dividends. However, it also removes the possibility of beating the market.
However, investors can get around this by building an investment portfolio with low-cost tracker funds at its core, with a few actively managed funds on top. This can work particularly well when the active funds focus in markets that are less well researched and there is still room to exploit inefficiencies.
First 50 funds
Vanguard funds constitute nearly one fifth of the Moneywise First 50 Funds. This is because they provide variety, quality and value for personal investors.
The Vanguard LifeStrategy funds are of particular note. These funds are designed to be whole-portfolio solutions for investors.
They are ideal for someone who knows they want to participate in investing, but to do so cheaply and painlessly.
First is the Vanguard LifeStrategy 100% Equity A Acc fund. This fund is a pure equities fund designed to track the performance of global equities. It is invested in other funds, making it what is called a ‘fund of funds.’ This means that despite the high exposure to company stocks, it is very highly diversified.
Next is the Vanguard LifeStrategy 60% Equity A Acc fund. This fund is designed for an investor at a later stage of their investment journey, as 40% of the fund’s holdings are held in bonds.
Bonds tend to be safer than stocks as they are a form of debt, as opposed to a unit of value in the company. While the value of a company can fluctuate, debt is a constant paid back over time with interest.
Then there is the Vanguard LifeStrategy 20% Equity A Gross Acc fund – a very low-risk fund mostly consisting of bonds.
What makes the Vanguard LifeStrategy funds effective for shareholders is twofold: the low cost of investing, with ongoing charging figures (OCF) of just 0.22% in each case; and the holistic approach of the funds, which are diversified sufficiently to mean the investor can just pick one and be done if they wish.
For investors who want more specific funds than the above from Vanguard, Moneywise recommends several other funds. See the box (far left).
Jack Bogle “is the very best friend the investor has ever had”
Jack Bogle’s legacy
The investment community has not shied away from praising Mr Bogle’s achievements. At its most basic, he is credited with giving individual investors a better deal.
Arthur Levitt Jr., former chairman of the US Securities and Exchange Commission (the US equivalent of the UK financial regulator, the Financial Conduct Authority), says: “Jack Bogle has given investors throughout the world more wisdom and good financial judgement than any person in the history of markets.”
Ben Stein, an American columnist and author, adds, he is “the very best friend the investor has ever had”.
Mr Bogle’s measured his achievements through the prism of his own idealism.
He said: “Idealism is everything. Sure, it’s difficult to measure up to high ideals, but just to have them there as your goal, knowing that you can never measure up to them, is worthwhile.
“I don’t know what the future holds. I’m going to guess now I won’t be around then, but the people will really be saying: ‘He made a difference in this industry.’ This one man, one person – this one person made a difference. Even one person can make a difference.”
Vanguard LifeStrategy 60% Equity A Acc
Ongoing charge (OCF): 0.22%
As at 21 January 2019
Source: FE Trustnet
Five-year discrete calendar performance of Vanguard LifeStrategy 60 (%)
|Vanguard LifeStrategy 60||9.4||2.5||18.3||8.7||-3.1|
Source: FE Trustnet, 21 January 2019
- Vanguard FTSE UK Equity Income Index A
- Vanguard FTSE Developed Europe ex-UK Equity Index A
- Vanguard US Equity Index A Acc
- Vanguard Global Bond Index Hedged Acc
- Vanguard UK Government Bond Index Acc
- Vanguard Global Small-Cap Index Acc