In Trillions: How a bunch of Wall Street renegades invented the index fund and changed finance forever, Robin Wigglesworth explores the emergence of the index fund as an unparalleled invention in recent financial history. Taking the reader on a road trip through the history of financial markets, this readable book will appeal to those who have studied economics and wish to connect familiar concepts, written Maria Zhivitskaya.
Trillions: How a bunch of Wall Street renegades invented the index fund and changed finance forever. Robin Wigglesworth. Penguin business. 2020.
Robin Wigglesworth, the FinancialTimesThe global financial correspondent for , which focuses on the biggest trends reshaping markets, argues in its latest book that the index fund is an invention unprecedented in recent financial history. trillion explains the history of financial innovation and index investing, told through the personal accounts of “Wall Street renegades” and those who made them possible. Index funds are unambiguously presented as a force for good, reducing the fees payable to financial professionals and thus bringing substantial tangible benefits to individual investors saving for retirement and other financial goals.
The rise of index investing is a powerful trend in finance – Bloomberg estimates that passive management now comprises 43% ($10 trillion) of U.S.-based mutual funds and exchange-traded funds (ETFs), up from 32% ($4.1 trillion) in 2015. globally, more than $26 trillion, or more than a year’s production in America – is now held in such funds, which is “almost twice the size of the private equity, venture capital and hedge fund industries combined”. The fundamental principle of index funds is to be “average”. The majority of active managers charge at least 1-2% per year while not beating the market in the medium term: “Stats vary, but […] only 10-20% of active funds outperformed their benchmarks over a rolling ten-year period” (8). In contrast, index funds charge as little as 0.03% to closely track a major stock index.
trillion begins with a famous bet between Warren Buffett and Protégé Partners, a New York-based asset management and advisory firm. In 2007, Buffett bets $1 million that no investment professional could choose a portfolio of at least five hedge funds that would outperform a low-fee S&P 500 index fund over the next decade. Active managers with their high fees, Buffett explained, started out at a disadvantage and had to compensate for those fees. Buffett argued in his 2016 letter investors that the efforts of active managers were “largely self-neutralizing and that their IQ would not be enough to offset the costs they charge end investors” (22). Buffett chose the low-cost Vanguard fund and won the bet a decade later, resulting in a charitable donation. Naturally, “Buffett maintains that being a professional investor is not an impossible task, but he doubts that many can succeed” (16). “The bet is symbolic of bigger changes in the industry,” says Wigglesworth.
trillion takes the reader on a well-articulated road trip through the history of financial markets from their academic origins before moving on to indexing, mutual funds, ETFs and responsible investment products. It’s an easy read, told through vivid and relatable stories of the people involved.
We begin our journey in France in 1900, with French mathematician Louis Bachelier’s random walk hypothesis based on his doctorate, and over time we get to know Harry Markowitz, William Sharpe, Eugene Fama, Fischer Black and Myron Scholes, John Clifton ‘Jack’ Bogle and Larry Fink, all of whom contributed to the evolution of financial theory, opening the way to the emergence and triumph of index funds. For those who have studied economics before, this book connects the dots between names you probably already know in a captivating way. There are many PhDs at the University of Chicago, with many colleagues in common and a shared desire to innovate at the intersection of industry practice and academia.
The author seems to particularly like Vanguard and its founder, John Clifton ‘Jack’ Bogle. After an economics degree from Princeton University, Bogle launched his active investment career in Wellington, but was asked to quit twenty years later due to a failed merger. This led him to create Vanguard in 1975, today the second largest asset manager in the world. Wigglesworth thinks no one is more religious than a convert – once an active manager, Bogle changed his stance to become a strong believer in passive management and created the first index fund available to individual investors. As a mutual organization, Vanguard could operate at cost, returning any profit to its constituent funds, further reducing fees for its customers.
Edward ‘Ned’ Johnson, the son of Fidelity’s founder who was responsible for his rise to one of the world’s greatest asset managers, observed: “I can’t believe the great mass of investors will settle for receiving average returns.” . The name of the game is to be the best” (114). However, Vanguard has reshaped the landscape by finding a niche as a low-cost, market-mimicking vendor in a high-cost industry.
ETFs were the next big innovation in indexing, which the book explains in detail. ETFs hold several underlying assets, but they are exchange-traded just like stocks, so they tend to be more profitable and more liquid than mutual funds. Fink, CEO of Blackrock and a member of the “rarified classes of corporate executives referred to only by their first name” (234), compares the impact of ETFs with the way Amazon has transformed retail – with lower prices, convenience and transparency, as opposed to the complexity and opacity of the asset management industry.
Wigglesworth celebrates this passive revolution, but doesn’t spend enough time on the potential pitfalls. Much of the book is drawn from various biographies and memoirs, so it could be accused of oversimplification, full of the success stories of brilliant Ivy League graduates. There must have been more missteps along the way than we know of, and it would have been helpful to read them.
Another shortcoming is the book’s US-centric perspective, with European and Asian actors barely mentioned. One exception was the call from Simon Pilcher, head of the Universities Superannuation Scheme (USS), one of the UK’s largest pension schemes, to redirect its activities away from traditional active equities, despite the good performance of their mandates, in favor of thematic quantitative actions. passive strategies and mandates (274).
Wigglesworth launches the classic quote that “it is difficult to make predictions, especially about the future”, then sticks to it by refusing to extrapolate on past performance or discuss how index funds or the financial landscape in general could develop. The book presents a readable overview of financial markets through the lens of index investing and will appeal to those who have studied economics and want to relate familiar concepts. Perhaps Wigglesworth’s next book could include a review of more recent developments, including the expansion of environmental, social and governance investing as well as the rise of alternatives and private capital markets.
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Note: This article gives the point of view of the author, and not the position of the USAPP – American Politics and Policy, nor of the London School of Economics.
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About the Examiner
Dr Maria Zhivitskaya obtained a PhD in Risk Management from LSE in 2015. She now works in the asset management industry and specializes in ESG. She also teaches master’s students at the Paris School of International Affairs and MBA students at Saïd Business School in Oxford.