The Vanguard Group is a privately-owned investment management company that was founded by John C. Bogle on May 1, 1975. Located in Malvern, Pennsylvania, Vanguard is the largest provider of mutual funds and is the second largest exchange-traded funds provider in the world after BlackRock’s iShares.
Vanguard also offers brokerage services, education account services, financial planning, asset management, and variable and fixed annuities. It serves investment companies, institutional investors, individuals, retirement plan sponsors, and financial advisors. Vanguard has expanded its fund offerings to over 175 U.S. mutual funds and 195 other funds in the international market as of September 30, 2017. It serves more than 20 million investors in over 170 countries.
Ownership Structure of Vanguard
Unlike other investment firms, Vanguard is structured as a client-owned company with no outside owners seeking to profit from the company’s investments. The company is owned by its funds, which are then owned by the shareholders. This makes shareholders the real owners of the company, and there are no outside investors apart from the shareholders. This structure not only prevents conflicts of interest but also lowers the amount of expenses charged by its funds. Vanguard managed to reduce the average expense ratio for its funds from 0.89% in 1975 to 0.12% in 2016.
History of Vanguard
The Vanguard Group of Investment Companies was established in 1975 by John C. Bogle. However, Vanguard’s predecessor, Wellington Fund, was started in 1929 by Walter L. Morgan, a certified public accountant who wanted to create a portfolio for ordinary investors to diversify their investments. Bogle joined Wellington Management Company immediately after graduating from Princeton University in 1951. The urge to venture into mutual funds originated from a study Bogle conducted while at Princeton University. Through the study, Bogle found out that most mutual funds in the United States did not make enough profits unless invested in the S&P 500 stock market index.
Working at Wellington Management Company
While working at Wellington Management Company, Bogle was hired by the founder, Walter Morgan, to take over the management when the latter decided to retire from active management of the fund. Bogle took over at a time when the company was struggling, and Morgan wanted him to do whatever he could to revive the fund. Bogle established a growth strategy that included hiring experienced portfolio fund managers, acquiring an aggressive growth fund, and diversifying into the investment counsel business.
In 1966, Bogle forged a merger with a Boston-based Thorndike, Doran, Paine and Lewis, Inc, a successful investment firm. The company now owned two funds, i.e., Wellington Fund and Ivest Fund. The acquisition was completed in 1967 and Bogle became the President, and later, CEO in 1970. After the merger, the market became unfavorable due to the stock market decline and both funds generally did poorly. There was a growing dissatisfaction among management on the firm’s poor performance, and the associates from the Boston-based firm, who held a majority stake in the company, decided to fire Bogle in 1974.
Formation of Vanguard
Although Bogle was angered by the firing and loss of a company he considered his own, he did not give up on the company. He was voted by the Wellington’s directors as chairman when U.S. federal laws required the fund to name a board of directors that was independent of the managing company’s board of directors. Bogle advocated to the company’s board of directors that the Wellington Fund and Invest Fund be given independence from the Wellington Management Company. Bogle chose to rename the fund “Vanguard” in honor of Lord Horatio’s HMS Vanguard during the Battle of the Nile. Wellington’s Board of Directors initially resisted the name, but later approved it after Bogle mentioned that the fund would be listed next to Wellington funds. Bogle registered the name, and the Vanguard Group of Investment Companies opened in July 1975.
Growth of Vanguard
After the formation of the company, Bogle focused on an aggressive growth strategy with a keen eye on a passive fund tied to the performance of the S&P 500. In 1976, Vanguard established the First Index Investment Trust, later renamed to Vanguard 500 Index Fund. The fund then issued its first Initial Public Offering with the intention of raising $150 million but only managed to raise $11 million.
Due to the poor reception, the bank that managed the fund tried to persuade Bogle to cancel the fund, but he decided to continue with the venture. The fund only appreciated up to $17 million during the first year, but later rose up to $100 million when Bogle convinced Wellington’s directors to merge one of the Wellington’s funds managed by Vanguard with its index fund. With the success of its first fund, Vanguard launched other mutual funds, including the Total Bond Fund in 1986, the Vanguard Extended Market Index Fund in 1987, and more funds offered in the next five years. Vanguard became the largest mutual fund provider in the world in the 1990s.
Key Executives for the Vanguard Group
John C. Bogle (Founder and former President and CEO)
Bogle founded Vanguard Group Inc. in 1974, and he served as the President and CEO of the company until he attained the company’s mandatory retirement age of 70 years in 1996. After his exit, Bogle handpicked his successor John Brennan to take over the leadership of the company. He then returned to the company briefly as senior chairman until 1999 when he left Vanguard and moved to Bogle Financial Markets Research Center.
F. William McNabb III (Chairman)
F. William McNabb III is the current Chairman of the board of Vanguard Group Inc. He joined the company in 1986, served as a managing director from 1995 to 2008, when he became the CEO after the exit of John Brennan. He retired as CEO of Vanguard in 2017.
Mortimer Joseph Buckley (President and CEO)
Mortimer Joseph Buckley is the current President and Chief Executive Officer of Vanguard Group Inc., effective January 1, 2018. He joined Vanguard Group in 1991 as an assistant to the company founder, John Bogle. He previously served Vanguard as its Chief Information Officer (2001-2006), head of Retail Investor Group (2006-2012) and Chief Investment Officer (2013-2017). In 2017, Buckley was unanimously elected by Vanguard’s Board of Directors to succeed William McNabb III as CEO.