John Bogle Inspired Our Arkansas Firm (Alan Tedford Commentary) - Southern Business Review


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Sunday, February 24, 2019

John Bogle Inspired Our Arkansas Firm (Alan Tedford Commentary)

On Jan. 16, investors around the world mourned the death of John C. “Jack” Bogle, the legendary founder of the Vanguard Group and creator of the first retail index mutual fund.

Jack Bogle was a man of irreproachable integrity and boundless energy who profoundly improved the mutual fund industry and investing. His idea was to create an index fund that would try to replicate the index with lower costs than actively managed funds, which seek to beat the benchmark index and charge higher fees.

Bogle founded the Vanguard Group and in 1974 and in 1976 launched the First Index Investment Trust, the first index fund available to the public and the forerunner of today’s Vanguard 500 Index Fund.

The first response was less than enthusiastic, with the initial public offering raising a mere $11 million, well less than the $150 million desired. Bogle’s philosophy was attacked by competitors in the money management business, some going so far as to claim it was un-American to simply try to mimic the benchmark index as opposed to trying to beat it.

After a slow start, the Vanguard 500 Index Fund has steadily grown to what is now one of the largest mutual funds in the world with assets in excess of $400 billion. Today, the Vanguard Group oversees total assets of more than $5 trillion as investors have come to understand the many benefits of purchasing indexes.

Data on equity performance over the past 15 years reveals that well over 90 percent of large-cap, mid-cap and small-cap managers failed to outperform their respective benchmarks. Data such as this has been around for decades, but in recent years large numbers of investors have awakened to the futility of paying high fees and getting subpar performance.

According to Morningstar Inc., as of the end of 2017, index funds represented almost 45 percent of all equity assets, up from 20 percent in 2007.

Few investors are as familiar with the name Nathan Most, but his impact on the investment landscape approaches Bogle’s.

In 1993, at the age of 73, Nate Most, an employee of the American Stock Exchange, developed the first exchange-traded fund. An ETF is a marketable security that is designed to closely track a particular equity or fixed-income index, commodity or a basket of assets. Unlike a mutual fund, whose pricing is determined at the close of trading, ETFs trade throughout the day like any other stock.

By 2004, there were more than 250 ETFs that mirrored equity and fixed-income indexes trading on the stock exchange, compared with more than 4,500 ETFs today.

At that time, my father, Bill Tedford, and I saw an opportunity to combine the benefits of Bogle’s index approach with Most’s creation to build an all-ETF asset allocation program.

Because index portfolios contain thousands of stocks (or bonds) instead of dozens, the law of large numbers allows for more comprehensive analysis of probable portfolio behavior.

This data-based approach helps our clients define their risk tolerance and raises their comfort. They know they are unlikely to experience more market volatility than they had anticipated.

In addition to utilizing low-cost ETFs, we applied the logic Sam Walton stressed of keeping costs low and passing on the savings to the clients. As a result, we were able to charge a management fee that was far less than most investors were accustomed to paying.

We fully agree with Jack Bogle when he said, “In investing, you get what you don’t pay for. Costs matter.”

Witt Stephens Jr., who wholeheartedly embraced the logic of investing in ETFs, approached us in 2017 with the idea of starting a new registered investment advisory firm built around our strategy of low-cost index investing and ultralow management fees for clients.

After a combined 70 years at Stephens Inc., we left in October 2017 and launched Stephens Group Asset Management LLC in partnership with Witt and his sister Elizabeth Campbell.

We, like investors the world over, owe a large debt of gratitude to Bogle and the wonderful innovation he brought forward. He completely changed our professional and financial careers. As Warren Buffett said: “Jack did more for American investors as a whole than any individual I’ve known. ... He converted in a 30-year period a lot of people to the right religion of investing. And it’s a good religion. It pays off.”

We couldn’t agree more.

Alan B. Tedford is managing partner at Stephens Group Asset Management LLC of Little Rock. Email him at