Preview of Things to Come; A Merger Which Unraveled and Spawned the Passive Investment Movement
The business of managing other peoples' money, in both agency and fiduciary formats, had its beginnings in Boston. Jack Bogle, Vanguard's founder, once estimated that by the early 1950s fully 45% of US mutual fund assets under management were in the hands of such vehicles as Massachusetts Investors Trust, Investors Mutual, Keystone Funds, Tri-Continental, etc.1
In the first decade after WWII, State Street Management, headed by Paul Cabot and later George Bennett, ran Harvard's endowment — even though both in succession also served as Harvard's Treasurer. George Putnam and Putnam Investments assumed the Harvard Endowment reigns (his father, George Putnam senior, founded the firm which still bears his name). In another family dynasty, Ned Johnson's father started Fidelity Funds (home of Peter Lynch's Magellan Fund).
In the late 1960s, the Wellington-Ivest merger captured the attention of Boston's money management community and the east coast financial world. In the early 1970s, Dean LeBaron's Batterymarch alerted portfolio managers to what the future of investment information technology (today's FinTech) had in store for the profession. When he suggested brokerage commissions would eventually revert to mere pennies per share, or even to zero, or that brokers would pay transacting buy-side players for execution services, we all thought he had lost touch with reality.
Vanguard's Origins
When the Wellington-Ivest (Philadelphia-Boston) combination unraveled in the mid-1970s because of the differing investment philosophies of succeeding principals, such amalgamations began to be regarded more realistically. The Wellington-Ivest dissolution set Jack Bogle free, led to Vanguard's formation, and set the forces of passive portfolio management in motion.
In 1978, the passive movement began to gain notice with two particular events:
- Jack Bogle's Vanguard was chosen for its first $10 million Large Company (S&P 500) Index Fund allocation by a Philadelphia-based insurance company, and
- AT&T's defined benefit pension fund diverted a substantial portion of its equity allocation to index fund vehicles.
Today, the passive approach manages nearly 30% of all institutional and individual liquid investment assets (bonds and equities).
The only major Boston-based investment management firm to foresee the implications of the shift to passive management was State Street Bank (today, State Street Global Advisors), which remains a significant international player in this marketplace. Most other Boston managers continue in the active mode today, clinging to the assertion that a distinct "information advantage" can achieve excess vs. benchmark risk-adjusted returns. Boston's investment community remains solidly rooted in the stock picker's world of active portfolio management.
____________
1 JC Bogle, of whom Warren Buffett once wrote, "If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle." Speech before the Boston Securities Analyst Society, May 17, 2013. See Big Money in Boston: The Commercialization of the "Mutual" Fund Industry.
< Return to Back to The Future: Boston, A Town Steeped in the Culture of Active Money Management
Sign The Guestbook
The author welcomes your feedback. Please sign the Guestbook to let us know of your visit to this website. There is a place to offer your suggestions, comments and/or questions.
