Indexing has become a highly popular method of investment, forming the foundation of tens of thousands of investment portfolios, and Vanguard's first index fund is now the world's biggest managed fund of any type.
In Australia, retail and wholesale investors have truly embraced the concept of index investing since Vanguard entered the Australian market in 1996 and launched its first index funds.
Vanguard Australia currently has $70 billion under management, a dominant share of the total Australian indexed-fund market.
Why are Vanguard funds so successful?
Much of the success of Vanguard is attributable to the simplicity and commonsense of indexing as an investment concept.Indexing provides investors with the means to gain exposure to a whole market (or index) at minimal cost. It's as straightforward as that.
This approach to investing makes compelling sense because investors as a group cannot beat the market because they are the market. In reality, investors as a group must underperform the market because of investment costs.
The challenge for investors, therefore, is to keep those costs as low as possible while being diversified throughout a market. This can be achieved with an index fund.
In the beginning
Vanguard founder John C. Bogle traces the origins of the first index fund for retail investors back to December 1949 when he read a feature in Fortune magazine about the tremendous potential of the funds management industry.Then a young undergraduate at Princeton University, he decided to make funds management the subject for his university thesis.
Based on the evidence he gathered, his thesis concluded that fund managers should not hold out expectations to investors of being able to outperform market averages.
John Bogle says the "seed was planted" by his thesis for the founding of Vanguard's first index fund 27 years later.
Vanguard and victory: The history of Vanguard's name
Vanguard derives its name from HMS Vanguard, Admiral Nelson's flagship at the Battle of the Nile in August 1798. Aboard the HMS Vanguard, Nelson commanded the fleet that destroyed Napoleon's French squadrons which has been described by his biographer as 'the most complete victory ever recorded at sea'. Admiral Lord Nelson died aboard the HMS Victory when he led the British fleet at Cape Trafalgar in 1805.When Jack Bogle and his company The Wellington Management Company sought a new name for a new organisation to assume responsibility for The Wellington Group of Investment companies, these two names were considered. 'The Victory Group' and 'The Vanguard Group' - both associated with the Napoleonic Wars era, in which the Duke of Wellington had made his mark, both words began with the letter V, Vanguard means 'leading the way' and Victory means 'triumph over the enemy' - so both names setting out a strong goals for the organisation. On May 1 1975, The Vanguard Group of Investing Companies commenced operations.
Timeline for change
1975: Vanguard under the leadership of John Bogle begins operations in the US with just 28 employees. Indeed, the investment concepts for the first retail index fund were developed by Vanguard's entire strategic team comprising just three people. Today, Vanguard has more than 12,000 employees world-wide.1976: Vanguard in the US establishes the world's first index fund for retail investors, the Vanguard® 500 Index Fund, based on the S&P 500 share market index. Today, this is the world's largest managed fund, of any type.
1986: Vanguard launches the world's first bond index fund for retail investors in the US. This was to become one of the world's biggest bond funds.
1990: Vanguard in the US creates the first international share index funds.
1994-1996: Vanguard's index funds begin to become widely accepted by the most serious investors and gain considerable coverage in the investment and financial press.
1995: John Bogle publishes his booklet, The Triumph of Indexing, highlighting why index investing had proven such a success. By now, Vanguard's funds under management had grown to $US18 billion - up from the initial assets of only $11 million. Rival fund managers were no longer describing index funds as "Bogle's Folly", and the indexing concept was being widely imitated.
1996: Vanguard opens its first Australian office and in the same year launches the first index funds in Australia for wholesale investors.
1998: Vanguard Australia launches the Vanguard® Investor Index Funds for retail investors and the Vanguard® Pooled Superannuation Trusts.
2001: Launch of the Vanguard® Personal Superannuation Plan in Australia.
2004: Vanguard becomes the first Australian fund manager to report after-tax returns for non-superannuation funds. This is a key advancement because tax can extract a large proportion of an investor's overall return.
Vanguard in Australia and the US has long educated its investors on the impact of tax at different tax rates so they can make better informed investment decisions. And Vanguard has always focused on the tax efficiency of its funds, including through its buy-and-out strategy to defer capital gains and minimise transaction costs.
2006: Vanguard celebrates its first decade in Australia. It now offers Australian investors a wide selection of multi-sector and sector-specific index funds, as well as a superannuation fund and a pension fund. Wholesale investors have access to even a wider selection of sector-specific funds including global infrastructure.
2007: Australia's simplified super is introduced with tax-free retirement benefits for those over 60. This significantly increases the popularity of superannuation including of self-managed funds, and, in turn, lifts the popularity of Vanguard's index funds.
2008: The long-running bull share market transforms into a bear market. Vanguard, as the leading index fund manager, emphasises to Australian investors how wide diversification and minimal costs - two fundamental characteristics of index funds - are even more crucial when the share market experiences intense volatility and sharp downturns.
What's ahead for Vanguard?
More individual investors and superannuation funds are recognising how Vanguard's index funds can minimise investment transaction costs, tax costs and ongoing investment management costs while providing exposure to widely diversified portfolios.Seven of the 10 largest super funds in Australia use indexing in their portfolios, along with many thousands of small-medium funds and self-managed funds. The concept of index funds that Vanguard first brought to retail investors has truly gained wide acceptance.
This means that the existing strong growth of index funds can only be expected to continue - particularly with the rapid ageing of Australia's population and the growing realisation of the need to save for retirement.
In his own history of the first retail index fund and the Vanguard Group, John Bogle notes a comment by much-acclaimed investor Warren Buffet in a Berkshire Hathaway annual report: "Most investors will find that the best way to own common stocks is through an index fund that charges minimal fees� Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals."
