The Vanguard Group

History

In 1951, for his undergraduate thesis at Princeton University, John C. Bogle conducted a study in which he found that most mutual funds did not earn any more money than if they invested in S&P 500 stock market index. Even if the stocks in the funds beat the benchmark index, management fees reduced the returns to investors below the returns of the benchmark.

Immediately after graduating from Princeton University in 1951, Bogle was hired by Wellington Management Company. In 1966, he forged a merger with a fund management group based in Boston. He became President in 1967 and CEO in 1970. However, the merger ended badly and Bogle was therefore fired in 1974. Bogle has said about being fired: "The great thing about that mistake, which was shameful and inexcusable and a reflection of immaturity and confidence beyond what the facts justified, was that I learned a lot. And if I had not been fired then, there would not have been a Vanguard."

Bogle arranged to start a new fund division at Wellington. He named it Vanguard, after Horatio Nelson's flagship at the Battle of the Nile, the HMS Vanguard (1787). Bogle chose this name after a dealer in antique prints left him a book about Great Britain’s naval achievements that featured the HMS Vanguard. Wellington executives initially resisted the name, but narrowly approved it after Bogle mentioned that Vanguard funds would be listed alphabetically next to Wellington funds.

The Wellington executives prohibited the fund from engaging in advisory or fund management services. Bogle saw this as an opportunity to start a passive fund tied to the performance of the S&P 500. Bogle was also inspired by Paul Samuelson, an economist who later won the Nobel Memorial Prize in Economic Sciences, who wrote in an August 1976 column in Newsweek that retail investors needed an opportunity to invest in stock market indexes such as the S&P 500. Competitors, which marketed high-fee funds claiming to beat the market, resisted Vanguard's low cost index approach. Some competitors labeled it Bogle's folly, and some claimed it was un-American to simply try to match the performance of the stock market, rather than to try to beat it.

In 1976, after getting approval from the board of directors of Wellington, Bogle established the First Index Investment Trust (now called the Vanguard 500 Index Fund). It raised $11 million in its initial public offering, compared to expectations of raising $150 million. The banks that managed the public offering suggested that Bogle cancel the fund due to the weak reception but Bogle refused. At this time, Vanguard had only three employees: Bogle and two analysts. Asset growth in the first years was slow, partially because the fund did not pay commissions to brokers who sold it, which was unusual at the time. Within a year, the fund had only grown to $17 million in assets, but one of the Wellington Funds that Vanguard was administering had to be merged in with another fund, and Bogle convinced Wellington to merge it in with the Index fund. This brought assets up to almost $100 million.

Growth in assets accelerated after the beginning of the bull market in 1982, and other mutual fund companies began to copy the indexing model. These copy funds were not successful since they typically charged high fees, which defeated the purpose of index funds. In December 1986, Vanguard launched its second mutual fund, a bond index fund called the Total Bond Fund, which was the first bond index fund ever offered to individual investors. One earlier criticism of the First Index fund was that it was only an index of the S&P 500. In December 1987, Vanguard launched its third fund, the Vanguard Extended Market Index Fund, an index fund of the entire stock market, excluding the S&P 500. Over the next five years, other funds were launched, including a small cap index fund, an international stock index fund, and a total stock market index fund. During the 1990s, more funds were offered, and several Vanguard funds, including the S&P 500 index fund and the total stock market fund, became among the largest funds in the world, and Vanguard became the largest mutual fund company in the world. Noted investor John Neff retired as manager of Vanguard's Windsor Fund in 1195, after a 30 year career in which his fund beat returns of the S&P 500 index by an average of 300 basis points per year.

Bogle retired from Vanguard as chairman in 1999 when he reached the company's mandatory retirement age of 70 and he was succeeded by John J. ("Jack") Brennan. In February 2008, F. William McNabb III became President and in August 2008, he became CEO. Both of Bogle's successors expanded Vanguard's offerings beyond the index mutual funds that Bogle preferred, in particular into ETFs and actively-managed funds.

Offices

Vanguard's corporate headquarters is in Malvern, Pennsylvania, a suburb of Philadelphia. It has satellite offices in Charlotte, North Carolina and Scottsdale, Arizona. The company also has offices in Australia, Asia, and Europe.