Indexing
History of index funds
1949: John Bogle, then a young economics student at Princeton University, "stumbled" on a feature article in Fortune magazine about the enormous potential of the funds management. This triggers his interest in investments funds and becomes the subject of his undergraduate thesis.
1951: His thesis is headed: 'Mutual funds can make no claims to superiority over the market averages'. (Mutual funds are similar to Australian unit trusts or managed funds.) Based on painstaking research, he showed how three-quarters of fund managers would not have earned more than an investor who had managed to invest across the index of America's 500 largest companies.
And John Bogle names his thesis as the "seed that germinated" into the first retail index fund established by Vanguard.
1969-1971: Wells Fargo used academic models to develop the principles and techniques for index investing. It was used on a small staff super fund and then abandoned as a "nightmare".
1973: 'A Random Walk Down Wall Street' by Princeton University professor Burton Malkiel is published, calling for the establishment of a low-cost fund that reflected the market index. As it happened, John Bogle did not read this book until some years after its publication.
1974: The American National Bank of Chicago creates a trust based on the US S&P 500 Index, minimum investment $US100,000.
1974-75: John Bogle says that apart from his own findings in his university thesis, the two inspirations for Vanguard's first retail index fund were a 1974 paper by academic Paul Samuelson pleading for a large foundation to establish an in-house index fund, and a 1975 Fortune magazine article by associate editor Al Ehrbar stating that managed funds consistently underperformed because of their costs.
1976: Vanguard under the leadership of John Bogle establishes the first index fund for retail investors, the Vanguard® 500 Index Fund. Today, this is the world's largest managed fund of any type.
1986: Vanguard launches the first bond index fund for retail investors in the US.
US academics Gary Brinson, Randolph Hood and Gilbert Beebower publish their landmark study, 'Determinants of portfolio performance', finding that stock selection and market timing have little impact on an investor's final return, and that long-term asset allocation is the main determinant. The theory behind index funds was, of course, based on much the same reasoning.
1990: Vanguard in the US creates the first international share index funds.
1991: Gary Brinson, Randolph Hood and Gilbert Beebower repeat their 1986 study and reach basically the same conclusions.
1996: The first index funds in Australia are launched by Vanguard for wholesale investors.
1998: Vanguard launches its first index fund for retail Australian investors and its pooled superannuation trusts.
2007: Australia's simplified super is introduced with tax-free retirement benefits for those over 60. This greatly increases the popularity of superannuation including self-managed superannuation funds.
Super funds across the spectrum - from SMSFs to some of the largest funds are increasing using index funds as a means to gain wide diversification for a low cost.