WEBVTT - The Lasting Impact of The Bogle Effect

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<v Speaker 1>You're listening to Bloomberg Business Week with Carol Messer and

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<v Speaker 1>Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. Well, there

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<v Speaker 1>are legendary investors and financial innovators that, over the decades

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<v Speaker 1>still stand out. Warren Buffett, value investing, Fidelities, Peter lynch

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<v Speaker 1>Amid the rise of the mutual fund industry. And then

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<v Speaker 1>there's Jack Bogel, whose idea of indexing and index investing

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<v Speaker 1>was well well ahead of its time. We're pleased to

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<v Speaker 1>have with us. Eric Balcunas, who's senior et F analysts

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<v Speaker 1>for Bloomberg Intelligence here with us. He's also the author

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<v Speaker 1>of The Bogel Effect, How John Bogel and Vanguard turned

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<v Speaker 1>Wall Street inside out and saved investors trillions. It's a

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<v Speaker 1>brand new book. Eric, It's good to have you with us.

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<v Speaker 1>How are you. I'm good, just you know, enjoying all

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<v Speaker 1>the Elon Must do and then take taking a break

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<v Speaker 1>to do my job. Congratulations. Congratulations, we're taking a break

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<v Speaker 1>from talking about Elon Must to talk Vanguard and e

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<v Speaker 1>t S with you. Um. You know one thing that

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<v Speaker 1>I was surprised to learn here is it's been reading

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<v Speaker 1>the book is how long it took Vanguard to catch on.

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<v Speaker 1>This was like decades in the making, because if you

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<v Speaker 1>look right now, Vanguard is you know, more than eight

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<v Speaker 1>trillion dollars in assets under management. It's just you know,

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<v Speaker 1>insert superlative here. Why did it take so long for

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<v Speaker 1>Vanguard to catch on? Yeah, this is where I think

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<v Speaker 1>the story has a little more drama than people think.

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<v Speaker 1>You know, a lot of Wall Street books are about

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<v Speaker 1>the rise in the fall and lets bogel it's sort

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<v Speaker 1>of like he just kept, you know, slowly rising. But

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<v Speaker 1>this guy lived in oblivion for about years. And the

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<v Speaker 1>reason it took so long, given what people today think

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<v Speaker 1>is an obvious trade, why not why wouldn't I own

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<v Speaker 1>the whole market? For three basis points is that he

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<v Speaker 1>operated outside of the system. He just did the Vanguard

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<v Speaker 1>refused to pay brokers, and at that time, it just

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<v Speaker 1>there were no R I A S. It was just brokers,

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<v Speaker 1>and so if you did not give them money or

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<v Speaker 1>loads or commissions or kickbacks, um, they were not going

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<v Speaker 1>to sell your funds. So he had to get people

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<v Speaker 1>to leave that system. He also had to try to

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<v Speaker 1>explain to people that an index fund was not average.

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<v Speaker 1>It sounded average. He had a lot of people trying

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<v Speaker 1>to position it that way, so he had to go

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<v Speaker 1>above and beyond to try to explain, hey, this is

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<v Speaker 1>not average. So those two things made it take a

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<v Speaker 1>long time. Also, the barguard mutual ownership structure, which lowers

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<v Speaker 1>fees the more assets it gets, took a while to

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<v Speaker 1>lower fees because the assets weren't quite there yet. So

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<v Speaker 1>as the assets started to come in the nineties and

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<v Speaker 1>two thousand's, that's when the fees really started to dip down.

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<v Speaker 1>And once they got below twenty fifteen basis points, it

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<v Speaker 1>was a done deal. And that's part of the point

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<v Speaker 1>of making the book. Also is the index fund was

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<v Speaker 1>a kind of a lucky byproduct. The real core nucleus

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<v Speaker 1>of all the things we're seeing today that we're from

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<v Speaker 1>Vogel and Vanguard are the mutual ownership structure UH and

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<v Speaker 1>the structure of Vogel himself. I must say he was

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<v Speaker 1>a different kind of guy, and so I think those

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<v Speaker 1>two things really are what I explore the most in

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<v Speaker 1>the book. I think i've I've talked with you about

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<v Speaker 1>this before, Eric, but I remember one of my first

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<v Speaker 1>shows that I did in financial television and financial broadcast

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<v Speaker 1>and it was a mutual fund show, and we would

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<v Speaker 1>always be like, Okay, you gotta have a Vanguard fun

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<v Speaker 1>out because it was a low cost, no cost option.

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<v Speaker 1>And our host was like, why would you pay fees

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<v Speaker 1>when you can go to Vanguard and get the same

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<v Speaker 1>strategy and pay no fees. I mean, he really was

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<v Speaker 1>iconic in terms of his impact on this industry. Yeah, absolutely,

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<v Speaker 1>I mean, you know it is it is just a

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<v Speaker 1>modern miracle that you can just get the whole stock market,

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<v Speaker 1>the whole bond market, and at this point international stocks

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<v Speaker 1>for under six seven basis points. A sixty forty now

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<v Speaker 1>can be gotten for three or four basis points, basically

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<v Speaker 1>frictionalist exposure. And that's a big theme in the book

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<v Speaker 1>I have as well, is that I think, you know,

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<v Speaker 1>Bogel's called the father of the index fund, but honestly

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<v Speaker 1>feel like you should be called either the father of

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<v Speaker 1>low cost investing or I like this phrase addition by subtraction.

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<v Speaker 1>What he did over forty five years was just remove

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<v Speaker 1>all the stuff that kind of gets in the way,

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<v Speaker 1>be it management, fees, brokers, turnover, trading costs, human emotion.

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<v Speaker 1>I mean, taking all that out, then you get the

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<v Speaker 1>total market with its almost frictionalist exposure, and that's why

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<v Speaker 1>it's a smash it. And it's not just Vanguard, which

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<v Speaker 1>takes in a billion a day. The rest of the

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<v Speaker 1>money goes to Vanguard esque index funds, even from Fidelity, right,

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<v Speaker 1>the fierce rival of Vanguard. That's how fidelities flows come

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<v Speaker 1>now is through those low costs inex funds. I mean

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<v Speaker 1>he totally. The whole industry now basically is governed by

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<v Speaker 1>Vanguard's mutual ownership structure, which nobody copied, but yet they

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<v Speaker 1>have to copy it in a way. Eric, When I

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<v Speaker 1>was reading this, I thought back to this article I

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<v Speaker 1>read in The Atlantic about a year ago by Annie Lowry.

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<v Speaker 1>It's entitled could index funds be quote worse than Marxism?

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<v Speaker 1>And it's actually a quote from analyst at Bernstein. They're

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<v Speaker 1>called passive investing worse than Marxism. I see you on

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<v Speaker 1>the zoom laughing right now about this. What do you

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<v Speaker 1>make of criticism of passive investing or index funds such

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<v Speaker 1>as this? Yeah, and most of it's laughable, I mean

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<v Speaker 1>the Marxism. Somebody else said that they're worse than the

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<v Speaker 1>misuse of antibiotics. I mean, they're i've heard. I've heard

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<v Speaker 1>her compared to the Salem, which trials people go crazy

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<v Speaker 1>with this stuff. Look, if you think about it, all

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<v Speaker 1>people have done is moved from closet indexing. If you

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<v Speaker 1>look at the Fidelion Magellan, it largely owns Apple, Amazon, Google, right,

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<v Speaker 1>and they've moved to actual indexing and saved about seventy

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<v Speaker 1>basis points in the process. Everybody own the same stocks,

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<v Speaker 1>they just now own it in a different format. And

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<v Speaker 1>indexing isn't really necessarily totally passive. Russell one thousand's different

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<v Speaker 1>than the SMP. The SMP, by the way, is run

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<v Speaker 1>by a human committee, has some rules. It's just more

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<v Speaker 1>rules based active. So I try to get rid of that,

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<v Speaker 1>that line between active and passive. What really is going

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<v Speaker 1>on is low cost. And I premise in the book

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<v Speaker 1>that let's say indexing wasn't a thing and Vanguard had

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<v Speaker 1>their mutual ownership structure and only active mutual funds, in

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<v Speaker 1>my opinion, they would be the biggest active fund manager

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<v Speaker 1>six times over because they would have been bringing a

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<v Speaker 1>gun to a knife fight over and over. It's the

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<v Speaker 1>low costs that's the thing. And I don't think anybody

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<v Speaker 1>who writes these articles would really have too much of

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<v Speaker 1>a problem. The one thing we got to watch for

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<v Speaker 1>is voting power. Vanguarded black Rock now own about seven

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<v Speaker 1>eight percent of all stocks, and so we have to

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<v Speaker 1>wonder how are they going to make sure that they

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<v Speaker 1>don't vote in a way that is different than their

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<v Speaker 1>shareholders or misuse that power. So far, I think they're fine,

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<v Speaker 1>but we have to watch that. That's probably the one

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<v Speaker 1>thing I would think about watching Incredible Influence. Hey, we

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<v Speaker 1>just have about a minute left here. What about Bogel

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<v Speaker 1>demand I'm surprised to hear about how spiritually was um?

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<v Speaker 1>Just interesting? Yeah? Look, uh, I asked everybody interviewed this question.

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<v Speaker 1>Why is has nobody covered banguards mutual ownership structure? They said, well,

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<v Speaker 1>because people go to Wall Street to get rich, they

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<v Speaker 1>don't want to drive a Volvo. And then the other question,

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<v Speaker 1>I said, well then why did Bogel do it? And

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<v Speaker 1>they're like, I don't know. Good questions. So a whole

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<v Speaker 1>chapter is called Explaining Vogel, where I try to explain

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<v Speaker 1>the ingredients that went in to create this very unusual person.

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<v Speaker 1>I almost feel he was miscast in this industry, but

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<v Speaker 1>maybe the industry needed a miscast in this era to

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<v Speaker 1>sort of bring it to a more fiduciary place. So

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<v Speaker 1>he was perfectly cast in a way, but definitely not

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<v Speaker 1>your average Wall Street titan. And I again I explore

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<v Speaker 1>that in a whole chapter, uh, to try to explain

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<v Speaker 1>to you how he happens. It's but but it says

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<v Speaker 1>so much right because it was such a different, you know,

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<v Speaker 1>path that he took versus a lot of other financial

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<v Speaker 1>and Wall Street titans that are out there. Um, Eric,

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<v Speaker 1>two short a time, come back. We'd love to talk

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<v Speaker 1>more about what's in this book. Eric Baltuns he's our

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<v Speaker 1>senior et F analyst to EP Bloomberg Intelligence, joining us

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<v Speaker 1>via zoom from Philadelphia. Check out his book. Jack Bogel

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<v Speaker 1>wrote a lot um. But what's great about Eric is

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<v Speaker 1>really just a great perspective on this man who really

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<v Speaker 1>transformed in industry in way of investing. The book is

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<v Speaker 1>called The Bogel Effect, How John Bogel and Van Guard

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<v Speaker 1>turned Wall Street inside out and saved investors trillions. Really

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<v Speaker 1>thinking about the retail investor from from the get count. Yeah,

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<v Speaker 1>great read. I'm really enjoying it. All right. You are

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<v Speaker 1>listening to Bloomberg Business Week for tim Stenovik, I'm Carol Master.

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<v Speaker 1>Have a good and safe evening.