Episode 25: Robin Wigglesworth
Robin Wigglesworth
Financial Times' global finance correspondent based in Oslo, Norway.
You can also listen to the episode on Apple Podcasts & Spotify.
In this episode:
Robin launches into a lively and enthusiastic debate with Abraham, discussing:
How he got into journalism and what led him to becoming a global finance correspondent
Robin’s book Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. Diving into the details about:
The history of index investing
How big passive investing is today
The theoretical background for index funds
The roles Louis Bachelier and Jack Bogle had
And whether ESG funds are fad or fashion?
Guest profile
Robin Wigglesworth is the FT’s global finance correspondent, based in Oslo, Norway. He focuses on the biggest trends reshaping markets, investing and finance more broadly across the world, with a particular focus on technological disruption and quantitative investing, and writing longer-form features, analyses, profiles and columns.
He was previously the FT's US markets editor, spearheading its coverage of financial markets and asset management across the Americas, deputy head of FastFT, capital markets correspondent, and Gulf correspondent.
Twitter: @RobinWigg
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Featuring Abraham Okusanya (Host), Robin Wigglesworth (Guest) and Hana Dickinson (Producer).
Introduction (Hana):
Welcome to Retirementals, a podcast that dives headfirst into the issues facing the financial sector at the intersection of investment, technology, and financial advice. Hosted by Abraham Okusanya, you can expect raw honesty, critical analysis, and energetic interviews. Here is your host, Abraham Okusanya.
Abraham:
Welcome to Retirementals. It's really, really good to have you all on here on the podcast today, and I am very excited by my guest today. Robin Wigglesworth is the Global Finance correspondent at the FT and the author of a fantastic new book, Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. Robin, welcome to Retirementals.
Robin:
Thanks, Abraham. It's great to be here. I'm also very, very excited.
Abraham:
This is a topic close to my heart, as I was saying to you before we went live. You know, I'm not ashamed to say it's actually, you know, I am one of these arrogant people. When I see a book about a subject that I think I know a bit about, index is one, the history of investment. I suddenly go on the defensive and I say, what am I really going to learn about these, you know? But then I held my nose, as I've done on several occasions, and I push that button on Amazon and I bought a copy of the written copy of the book, because I like to mark things as I'm listening to it. And your book my friend is just packed with so much juice, so much about the history of index funds. So, I am really, really interested to get into all of that today. So congratulations on the book and let's start with that.
Robin:
Well, thank you. And I swear, you know, people who by both the audio and the digital version…they go straight to heaven. No purgatory. People that buy two books of a debut author's book, you know, straight to heaven. No waiting line. No question.
Abraham:
There may well be a special room for me because I'm making all the investment, you know, all of our team on the investment. So we have an investment management business called Betafolio, which is essentially index fund and factor-based index funds for financial advisers. I'm making everybody on that team read it, buy everyone a copy for Christmas. That's how good your book is.
Robin:
Well, that's music to my ears.
Abraham:
But before we go into all of that. Tell us a little bit about yourself, how you got into financial journalism and how you came to to to work for the FT.
Robin:
Yeah, so despite the weird last name which, like even in the UK, is kind of all this sounds like a Harry Potter character. I'm actually from Norway, so I was born and raised in Oslo.
Abraham:
I thought you were British?
Robin:
I hide it really well, but I've got the accent, but as soon as people start talking about Blue Peter or some other cultural touchstone, it flies straight over my head. I've got no clue what they're talking about. Like Doctor Who, I vaguely know who Doctor Who is now, but I've never, ever seen it. So I'm sort of flying under the radar British, I guess. But I grew up in Oslo, Norway, and you know, it's just a fantastically boring country and in the best possible positive way. But it does mean you cut out and quite often want to go abroad. And I wanted to be a journalist and I dreamt of being a war correspondent, but every young journalist wants to do that. And when I graduated, having studied Middle East politics, political Islam and international relations, and history and journalism. The only jobs, all the best jobs, were in financial journalism. I have always quite liked figuring things out, learning new things. I like learning things. That's why I love being a student as well. And I thought, “well, why not?”. So I got a job being a financial journalist in Dubai of all places because it was the Middle East. I thought, you know, that could be interesting, even though Dubai isn't very Middle East to me. And I just, I loved it. It was. It was incredibly daunting and scary getting thrown into, you know, I was covering banks in the Middle East, specifically Islamic finance, knowing absolutely zero at the time. But you know, people are quite helpful and kind. And if you show a genuine interest in trying to learn something, then they will respond and they'll try and help you. So that's generally what I've continued doing ever since. I did get to play war correspondent briefly as a Middle East correspondent for the F.T during the Arab Spring but the first cut was the deepest. So financial journalism is where I’ve generally stayed ever since.
Abraham:
Good stuff, and then did you work in America or covered American at a time?
Robin:
Yes, I moved around. So I joined the FT as a Middle East correspondent, then moved to London to cover finance, their markets. And then I moved over to lead the markets team for the FT on Wall Street. And now I've been writing a little bit about passive investing in index funds before then. But when I moved there, it’s when I decided to really get stuck in because, you know, with the FT, you can't cover everything. There's so much going on in the investing and finance and markets, all the time. So you kind of want to try and focus all your energy on the biggest, the most consequential questions. And for me, the biggest trend and probably the least understood, and the least well covered quite often, was the growth of passive investing and index funds. Because we cover hedge fund managers and private equity barons almost like celebrities. There's a tendency to do that even in some hardcore financial journalism, but index funds doesn't have that many great personalities, and we'll talk about some of them later. But I just thought it was just a huge thing and then, yeah, whilst I was in the U.S., I decided, this is just such a phenomenal topic that I wanted to write a book about as well.
Abraham:
Right, okay, good stuff. Let's dive into the book, I guess the first question I'm going to ask you is how big really is the index investing world or passive investing world today?
Robin:
Well, it's a quick question and only hard to answer because it's such a moving target. I mean, this also underscores how quickly it's growing. You know, when I started researching the book, there were $14 trillion in index funds.
Abraham:
Right.
Robin:
When I started kind of writing it, it was $15 trillion. By the time I had finished, basically writing, it was $16 trillion. By the time I actually hand in the book and it was going to print, it was almost $17 trillion. I think we're now closer to $18 trillion globally. And even that is just the public index funds, like the actual index mutual funds sold by Vanguard and BlackRock, or ETFs, for example. In practice, there are lots of big investors, whether a Sovereign Wealth
Fund in the Gulf or big pension plan in California that will do this in-house. They don't need to put their money into an actual fund. So if you look at index strategies, overall, I've tried to do some reverse engineering and looked at some public data sources, and I found a figure at the end of 2020 to be roughly, and this is very roughly but conservatively $26 trillion.
Abraham:
Wow. That's incredible. But that's not big, is it, because, you know, although in the US, people talk about half of mutual funds, right? Being, you know, more than half being impassive, the majority of the capital markets to date and the public market to date is still very much in the active side. And I'm not, buying and selling of stock market time and all that stuff. And that's not even to talk of, hedge funds who might be, you know, trying to get the capital market in some shape or form. So I guess the best first question is, it comes right out of the title of your book, which is are index funds or passive investing still really taking over the world?
Robin:
It has not taken over the world, and I agree there's a lot of scaremongering around this.
But you know, my fundamental thesis is that passive investing should be, that it is going to grow far quicker than pretty much everything else. But $26 trillion, even though it's yes, it's only worth of a slice of the entire global investment industry or the capital markets. We're still talking, you know, the entire private equity industry, the entire venture capital industry, the entire hedge fund industry put together, is less than half the size of index funds. So my view is that this is clearly reshaping finance. I always kind of see markets as an ecosystem. Imagine like the prairie or a jungle. And this is a new animal and this new animal came, you know, it was a tiny little rodent to begin with. It was kind of stomped on and laughed at by all the big animals, the hedge funds, the mutual funds. But now it's kind of doing the stomping itself. I think everybody else has to change their behaviour because of this growing force. So although it hasn't taken over markets at all. I think it's already having a huge impact, though it is probably misunderstood and underappreciated. And it's going to have an even greater impact in the next 10 to 20 years because, as you know well, the numbers are pretty unequivocal that this is a better way for the vast majority of people to invest.
Abraham:
Okay, so we're going to get into that. We're going to get into some of the criticism you talked about in your book. But let's come back to one of the things I love about your book, is the history. The stories of all the personalities. I think you call them a ‘cast of characters, the Jack Bogle’s of this world. You know, Jack Brennan and all of these people. But I want to start on the academic side, so you can trace the theoretical background of index funds to Bachelier, whom you called the index fund intellectual God Father. Talk to us about the people who really formed the academic underpinning for index funds.
Robin:
Well, it was a really large and colorful and interesting, a fascinating cast of people that did this. And this is why I wanted to write a book, right. Because there are lots of important stories that frankly don’t need an entire book. A book you need something that's going to be fascinating, and people are actually going to read it. And Bachelier is one of my favorites because I have a soft spot for people that essentially die. In complete obscurity, like Louis Bachelier was a nobody in his own life and is today considered not just the godfather of index fund, but of financial economics. Like this entire huge, vibrant field of economics, there are prizes named after him. And he was, you know, he came from a pretty affluent family in France and he was very smart. Wanted to study mathematics at the Sorbonne. This was the 19th century, but then his parents suddenly died, so he had to inherit the wine company his father ran and run it at the age of 18. He had to take care of his sisters at the same time. And he finally got the business up and running, he was going to go study finally at the Sorbonne, and then he was called up to the French army to fight Germany. So essentially, he bounced backward and forward, finally got a job, started studying in Paris because he didn't have the money that a lot of people had at the time. To study at the Sorbonne. You typically came from the grand families of France with tons of money. He needed to get a part-time job and the part-time job he got was at the Paris Stock Exchange. And this might seem a bit odd to us today, but working in the stock exchange those days was not a glamorous job. It was not a sexy area and for French academics in mathematics, it was kind of grubby. It was almost seen to be a little bit dodgy. So when he wrote his Ph.D. thesis on how stock prices seemed to move around at random and seemed to be fairly efficient and was kind of essentially no money to be made in trading stocks. His teachers, especially honorary prof Cournot. It was this famous mathematician, so right thought it was really original, but kind of they meant original in the kind of almost dissing way with a kind of, “oh, that was an interesting, original idea, but you're not getting our top-grade for that because it's finance, that's not proper maths”. So because he didn't get a top grade, he essentially never got tenure or hardly ever got tenure until right towards the end of his life. Bounced between jobs for decades and died in obscurity, but only, later on, was his Ph.D. thesis rediscovered by some American mathematicians and economists. And that became the seminal text for what we now call the random walk theory, or the efficient markets theory that was, you know, articulated by people like Eugene Fama, most famously.
Abraham:
And ultimately, Eugene Fama, William Sharpe was the other one. Really then essentially formulated this into something that's actually usable in investment management.
Robin:
Yes. So it tiptoed up towards it, right. So I always see it as two strands. So one was the dawning, very slowly dawning realisation that the average active manager does a bad job. No doesn't do a bad job, but they underperform the market. We needed somebody to prove that was true. And then you also in a parallel needed kind of a theory of why that was. Who's just saying it was true? Well, that wasn't probably enough. So people like Harry Markowitz, William Sharpe, Gene Fama, lots of these people won Nobel Prizes for their work. They showed essentially, first of all, that yes, the average active manager and people were able to calculate this until the computers existed in the sixties. The average active manager does actually significantly worse than the stock market in the long run. And the optimal trade-off between risk and reward tends to be the broadest, most diversified portfolio you can imagine and you traded as little as possible. When Gene Fama with his efficient market hypothesis, was able to basically put a nice big red bow around this hole, by saying “Well, the reason why the market is so hard to beat is that essentially they constantly bake in all new information and this information, for that matter, constantly”. So it means that, yes, you might occasionally jump on that bit of news before somebody else. But overall, in the long run, prices are pretty fair, according to what the most the average investor thinks. Now, I think the efficient markets there are really controversial for us today because frankly, even I don't think it's right in the narrow sense of the word, efficient. ‘Efficient’ is a loaded word. We think that means perfect, and we can see all sorts of hideously dumb things happening in markets every day, every year, through centuries. So saying that they were efficient seems mad. But for me, the quote I always come out with, because it's just a great quote. It’s from a British statistician called George Box. And he said the “All models are wrong, some are useful”.
So I think MH or efficient markets theory is kind of wrong in the way, that at least we intuitively understand efficiency to mean. But it is still a really good model for understanding how the market functions and why these really smart, hard-working professional investors on average, do a pretty poor job as well.
Abraham:
So the history of index funds cannot be written without the legendary Jack Bogle. But you put Jack in a completely different perspective for us. It turns out that he wasn't, you know, this apostle originally, wasn't an apostle of index investing. As a matter of fact, the way you framed this in your book and correct me if I'm wrong, is essentially he had written an article under anonymous names, you know essentially pooh-poohing, an passive investing in index investing and ultimately became a combat in an attempt to save his own career. So talk to us about that aspect of Jack Bogle.
Robin:
Well, it's a pretty incredible trajectory. But you know, I think people sometimes forget that Jack Bogle was from the beginning of his career, you know, worked in an active management shop, Wellington, and he was the wonder boy. He was one of the youngest high-flying executives in the entire mutual fund industry. And yes, it was while he was at Wellington, some academics on the West Coast dared to suggest that, maybe and, they didn't say that this would be a better thing…There's so much choice among fund managers, maybe we should have just a passive, unmanaged investment fund that just invests in the high stock market. And when they suggested that he basically pseudonymously ridiculed the idea and with his slide rule, calculated that average active managers, active managers actually do add a lot of value. Going to show that you can prove a lot of things by twisting the statistics and the data, whatever way you want. And Jack Bogle was not above that, but I think even though, you know, he was not always an ardent fan. I think there were some things that were always there. And, you know, he has earned his, he's earned the legend of Saint Jack, that he is this titanic figure and index funds would not be where they are today without his work. He was always cost-conscious. He was always bragged that he was a cheap Scotsman. You know, one of his friends once said his favorite drink was an eight-dollar bottle of cabernet sauvignon. He would always consistently order the cheapest thing on any menu. And what’s famous was where he went to a Plaza Hotel in New York because there was an annual meeting for Vanguard there. And he apparently asked for the broom closet and got the broom closet, got them to put a bed in the broom closet to save money. That's a legend, at least. But on passive funds that was purely chance. He essentially, in the sixties, Wellington wasn't doing that well. He was made CEO by the founder of the company, with a brief to turn the ship around. And Wellington had pretty conservative active mutual funds in the sixties, which was the first dot com bubble in many ways. But there weren’t dot coms then but there was Xerox and IBM and Kodak, and he decided to merge Wellington with a small but hotshot investment company in Boston. But when the first dot com boom the Go-Go era ended in the late sixties, early seventies. Essentially this merger is turned to dust, and Bogle and his former partners started arguing all the time. And although Bogle was the CEO and owned like a decent chunk of the shares, the others outnumbered him on the board. And in the end, the battle was so ferocious that the other Boston partners ganged up and sacked him. But he essentially did a Hail Mary pass as they call it in the US and basically asked the boards of the funds, because their independent in the US, to essentially declare independence, and that was a step too far. They didn't want to buy themselves out from Wellington because they were Wellington funds, that would have been legally iffy and ethically iffy as well, for that matter. But they did decide they set up basically an administrative company that would do the paperwork for the Wellington funds that Jack Bogle could lead and still collect his same CEO
salary. But this was, you know a bit of charity really, Bogle used that. And because he wasn't allowed to do investment management, the only thing he could do was what he called unmanaged investment. He argued that the index fund was unmanaged and therefore didn't breach the divorce agreement with Wellington. It was pretty much, it was nakedly basically a paid piece of corporate political playing. It was a gambit to try and basically declare his independence from Wellington. But, you know, and it did badly but I mean, look at where Vanguard is today. That clerical outfit is now the world's second-biggest investment group with over $8 trillion under management.
Abraham:
And what became of the Wellington Group? What became of that business?
Robin:
Well, it was the ongoing battles that lasted between Wellington and Vanguard by Bogle, and he was pretty vindictive towards his erstwhile enemies for quite a while. It hurt both groups to a certain extent, but in the end, they managed to get a rapprochement. And Wellington is today actually the single biggest manager of a lot of Vanguard’s money. So if you go to Vanguard and buy one of Vanguard’s Active Funds. Chances are it’s going to be managed by Wellington. So now Wellington is a trillion-dollar investment company in its own right. A very successful pedigree and a great culture. So luckily, unlike many divorces, this one ended up having a relatively happy end at least.
Abraham:
Now a word from our sponsor. Nicki Hinton-Jones is the Managing Director and Chief Investment Officer at Betafolio, the high-tech, low-cost discretionary model portfolio manager. Typical model portfolio service costs about 6 basis points. That's in addition to the funds, the platform, the advice fees. Tell us a bit about Betafolio’s view and approach on fees?
Nicki:
Well, I don't think anyone that knows us already Abraham would be surprised to hear me say that in a nutshell, MPS fees are too high. If you include the fund charges and the platform fee that you already talked about, we get close to 1% I think on average for a lot of retail clients. And that's before they start paying for the financial plan, which is the part of the service that will ultimately have the most value for them in their adviser relationship and experience. I mean, my view on fees and Betafolio’s view, is that they have a real impact on client outcomes that needs attention. And that's why we're building a scalable solution with technology that will allow us to keep costs low. And I think we also should consider the impact of these fees on advisers' businesses too, advisers need to to make a profit from their work, they need to have a viable business and their cost bases have been rising because of regulation. And the more costs they have to pass through to their clients for overcomplicated services, in turn, puts pressure on the adviser's own fees and ultimately makes it not possible for them to run a good business. Fees are really crucial, and I'm really happy that we're in a position to be having a positive influence on the trends in the market.
Abraham:
Good stuff. Thank you, Nicki. You talked in the book about Jack's frankly, I don't think there's a different word for it, stubbornness and how many in respects that led to a lot of personal disagreement and acrimony with people. But also, I think, is a greater strength because we are in Jack’s just doggedness and pig-headedness. The very first index fund that was supposed to do. I don't know what the forecast is they were looking for, you know, taking 3 million didn't do anything close to that, maybe 100 hundred million. So talk about that. How the very first fund nearly didn't happen because it was a failure.
Robin:
It was a cataclysm, really. I mean, they had high hopes. They knew that launching this was the first index mutual fund. So an index fund for ordinary investors. There were few index funds set up by pension for pension plans and other big institutional investors beforehand. And this was the first one for ordinary investors. And most ordinary investors did not know the data that we now know today, right. Like this academic paper writing wasn't something that permeated the ordinary world, and this is the pre-internet era as well. So they were selling it mostly to financial advisers and people like that, and it was tough. So they had to keep scaling down how much money they expected to raise. First, it was $150 million, which was always pretty ambitious - that was Jack Bogle's hope. And then they cut it down and cut it down and cut it down until I think they sort of estimated maybe $20-$30 million, which would have been a failure anyway. But then they only raised $11 million, which wasn't even enough to buy all the stocks in the SP500. Like they literally couldn't do what it says on the tin. They didn't have enough capital to do that. But Jack Bogle, like you say. His pig-headedness, and this is, I think, what people maybe even Jack downplayed later on in his life. That all the things that made him probably a very tough person to work for and with occasionally or live with, you know, was what made him such a titanic character. He had this incredible drive and he always had it from his youth. I mean, I talk a little bit about his biography, but like, I mean his early life was very sad and tragic, and you see how that really fired him up. But that was kind of notched up 20 times after he got sacked, because then he had that chip on his shoulder. Then he suddenly had a chip on both shoulders, and that was really why he was full steam ahead all the time 24-7. Absolutely no turning back. There's a reason why I call his biography ‘stay the course’, but that first index investment trust that raised $11 million was named ‘Bogle's folly’ because it was such a failure. And it stayed fairly for quite some time. But now that is known as the Vanguard 500 fund and is one of the biggest investment funds on the planet. I mean, it is hundreds of billions of dollars, it’s bigger than many pension plans. It's bigger than any sovereign wealth fund. That one big fund, that one single fund. So it's pretty incredible that occasionally a bit of stubbornness can really pay off.
Abraham:
Indeed, and that funds struggled for, you know, the first five years of its life just getting no traction whatsoever.
Robin:
No, it was five years of hard, basically getting nowhere. They merged another fund with it to get it a bit of critical mass. But it still kept stumbling on until the nineties and it's only really until the nineties, where ordinary investors really started embracing index funds. Either through 401(K)’s in the U.S. or through financial advisers. There was a big bull run that arguably you could say that, you know, is one of the biggest bull runs for financial markets ever in history hadn't started when it did. Vanguard, you know might have missed the boat a little bit. So, you know, there's always a bit of luck and serendipity. Bogle stuck at it, and I frankly, it wasn't until the late eighties and early nineties, is what I heard from many of his colleagues, that he started almost reinventing himself as what we now know ‘the index fund zealot’. Like he was always a big fan of the low costs. He was like you said, a cheapskate. He loved low costs and he loved indexing for that reason. But he loved active management. Several of his best friends were active managers, and he always felt that, you know, good active managers were worth their weight in gold. But he just felt like a lot of them charge too much money for their skill. So all the gains they generated kind of went into their own pockets.
Abraham:
Maybe he never abandoned that idea of active management. Because we know today that Vanguard is still one of the largest low-cost, active fund managers in the world, but Bogle’s son, right is an active investment manager. And he put up some of the money to get him started.
Robin:
Well, he's a quantitative investor. See other people, academics like Gene Fama, among others, have later on shown that there are some stock market characteristics that tend over time to lead to greater returns. And frankly, Vanguard does that as well. Like you say, I mean, Vanguard has, I think, several trillion dollars in active strategies of some kind, and some of those are traditional human fund managers, and some of those are quantitative strategies like Bogle junior does. So I mean, Bogle, I always had this great line. He was a great man for one-liners, but he said he never believed in the efficient markets hypothesis. But he believed in the cost matters hypothesis, as he called it. And I kind of agree, I think the vast majority of investors should choose index funds because it's easy, it's simple and you'll do better in the long run. All the data shows that, but I do agree that there are some fund managers that have shown that they can do better over time. The problem is, it's very hard to identify them ahead of time. Generally speaking of the really good, you might not have access to them anyway. If you look at many of the top hedge funds in the world, they're close to external investors and have been for decades. And if they are open, they typically charged so much money that it's kind of a wash at the end. So Bogle’s point was that a lot of active managers do themselves and their investors a disservice by charging so much money. They should just charge less money, make their life easier. It's like starting every football game, two goals down. So if you're an amazing team or an amazing striker, sure, maybe you can overhaul that disadvantage. But being able to do so year after year after year, it’s so difficult. And that's why high costs are such a headwind for most investors.
Abraham:
And it's also, at least my interpretation, that sort of pig-headedness that led to the rise of two of Vanguard's biggest competitors. This idea that ETFs was brought originally to Jack at a later date. And that led to the rise of State Street, and I would say that Barclays Global investors, which became iShares and BlackRock
Robin:
Exactly.
Abraham:
Talk to us a little bit about those two formidable competitors to Vanguard.
Robin:
It was a classic sliding doors moment, right. So the guy that was in charge of developing new products for the American Stock Exchange back in the eighties, nineties went to Jack Bogle to pitch him on the idea of tradable index funds, essentially. The Amex just desperately was kind of dying, it was squeezed in this battle between the New York Stock Exchange, the Big Brother and the upstart Nasdaq Index at the time, which had gone full, electronic was hip and young and all that. And Jack Bogle basically hated the idea. I mean, he really liked Nate Most, as this guy was called, but hated the idea that you trade index funds in and out. I'm pretty certain that everybody at Vanguard today rues the day Jack Bogle chucked Nate Most out of his office, and everybody at BlackRock and State Street are very happy that he did so. Nate Most then went to State Street and said, Look, because they there an exchange and they can't manage something like this themselves, but partnered with State Street to launch the first ETFs. Tradable index funds, essentially. And State Street also kind of didn't realise the potential of what they'd created to begin with. So they then had their lunch money sold as it were by Barclays Global investors, which ironically in a previous incarnation, was known as Wells Fargo Investment Advisers, which is where the very first index fund started. So it's kind of a back to the future kind of moment where WFIA is, as it was called, had been bought by Barclays and was called Barclays Global investors, and they soon after the ETFs had seen like states who do this and thought it was kind of a cool, interesting idea. So they started something called Webbs. It was a play on the fact that the first ETF was called SPDR and was nicknamed Spider. So I thought, well, we'll start some ETFs called Webbs, and they're kind of leaning on the imagery of it all. But they didn't do well. I mean, ETFs did not take off. It's similar to index funds. It took quite a while before they took off. But the reason why BlackRock was then later able to, iShares when it was part of BGR was able to leapfrog both State Street originator and Vanguard, the index fund supremo, was the fact that they realised sooner than others how you could essentially almost create like Lego blocks of investment risk. So an ETF is actually, a really flexible wrapper that you can do way more with than the classic mutual fund structure. So they basically decided under a CEO called Patty Dunn, one of the rare female CEOs of finance and it's a phenomenal story yourself. Like her father was an entertainer in Las Vegas and her mother was like a dancer. She studied journalism and started work at Wells Fargo as a secretary and rose to be the CEO. Pretty incredible, really. But she saw the potential with some other people, got Barclays, the bank basically chucked money at the project and then started iShares as not just like a little side project, but there were serious resources and muscle. Carpet bombed the market with all sorts of new ETFs, seizing real estate in that marketplace way before people realised what was going on. It's kind of an early version of what Silicon Valley today called blitz scaling, where you just decide, this is going to be big, we're going to basically seize everything. We don't care about making money for the first three or four years. We're going to chuck money at everything, build it as big as possible and then basically have like a dominant position. And that's what they did really cleverly. And then later on, obviously, Barclays ran into dire straits after the financial crisis had to sell the family silver. Sold BGI to BlackRock, which is now the world's biggest investment company by a mile. Thanks to our shares and the broader panoply of index funds that they acquired in the process.
Abraham:
And so now index funds are so big that, they've always attracted criticisms, but you talked in the book about, this sheer size of index funds and how it's now facing criticism. One of which is around how they are so big that they distort the markets apparently, and they make bubbles more likely. Talk a little bit about some of the criticisms that we receive, they've been laid out in index funds and whether there are any truths to them.
Robin:
No, I think this is, you know, the central message of my book. I want to write something that was like fun and interesting and told you the story of the past 100 years through this humble hero, the index fund, and now they conquer the world. But I think even fans like me and I'm a huge fan of index funds and passive investing. You cannot be blind to potential side effects, because we've seen it so many times through history, where some amazingly cool, rule-changing, world-improving new technology still has negative side effects. Like the invention of the car. Great, fantastic. But we suddenly need to build new roads, road safety, all these things, but it’s not the world where we had horses, right. And index funds is, I think, one of the most consequential inventions of the financial industry of the past half-century. So I think is it actually more important for fans of indexing to be open-eyed and not blind to potential side effects, the negative side effects. Now in practice, I think. Like you say, people have always been critical of index funds, mostly because frankly, active managers get squeezed by them, right. The finance industry, I mean, there were nice, hardworking, great people that work in that. But as an industry, it has thrived on complexity and cost and squeezing as much money out of people as possible. And index funds are the antithesis to that. They are cheap, simple and transparent, right? So no wonder the industry hates them. But I think more recently, there were basically four areas, I can see to varying degrees the criticism has some foundation to them. One which Jack Bogle talked a lot about as well is how especially ETFs, you can put any crap into an ETF, including stuff you really shouldn't put in there. So just because you call it an index fund doesn't mean that it has all the benefits of a cheap, well-diversified, simple, transparent portfolio. So increasingly, people are churning out silly products that, at best harm the investor, at worst could actually represent a systemic risk to the financial system because there's some silly stuff happening. The other one is just that these are index funds and the people that decide kind of where the money goes are the index providers. The people like construct the benchmarks that like the FTSE100 or the Dow Jones Industrial Average or the Nikkei or the DAX. And they have, because of the growth of passive investing, accrued a lot of power and influence without really necessarily wanting it. But it’s still there, and I think that is something we kind of need to grapple with because in many respects, they have more power over global capital now than many asset managers do. Like what MSCI, for example, says about whether China should be an index or not. It's hugely important to that country. And there are very little checks and balances on these things. The third one is which is the most popular one. But I find the least compelling is that index funds distort markets. Now, I've already talked about my mental model of this being a jungle and the index fund being a big new beast in there. So undisputedly, I agree that index funds are having an impact both on individual stocks. You can sometimes see funny weird shit happening or as the market as a whole, I think it's plausible. What I find very hard to see is any evidence that this is any more malign than the impact of any new investment vehicle, like hedge funds, like mutual funds, like ETFs, like investment trusts a couple of centuries ago. So whenever we invent some new basically investment vehicle or there's a new animal that comes into this jungle, it changes the ecosystem, the environment around it and index funds are no different. But I would argue that actually what they do is make markets overall more efficient because broadly speaking, on average, you'd expect the mediocre or the worse fund managers to be the ones that get squeezed out in the competition. So the model I always use, the metaphor is like a poker game. That you imagine we have some friends over and we play poker, and I have some friends who are incredibly smart and really good at poker, and some like me who are not. Statistically, you'd expect, there’s luck that plays into it, but statistically, you'd expect me and my worst friends to be the first people that lose all their money and drop out. But that doesn't mean the poker game gets any easier for my card-sharp friends who remain. No, it gets harder because you are playing against more skilled people. The dumb money's left, and that's kind of what we see in markets. But a lot of the people that kind of were index funds already in drag, that were kind of closet benchmark huggers, but just charge a lot of money to do so. They will get squeezed out and we can see this. And that's one of the reasons why I think. But even as we see more money go into passive funds and index funds, we can actually see the average performance of the active manager is actually getting worse, not better. People for a long time thought, “well, there's so much money going to passive, there’s going to be so many opportunities for active managers”. But in actuality, the opposite has happened. The fourth point that you nod on, is the sheer size, is the one I just think we cannot ignore. That already the BlackRock's, the Vanguard, the State Streets are so gargantuan that like, I think it's a bit of a worry. They practically control a chunk of the vote of most major listed companies in the world and certainly in the US and some other countries. But just look at how quickly they're growing and because of the economics of indexing means that it will always favor whoever can sell the fund the cheapest. Because the BlackRock SP 500 fund, is exactly the same as a Vanguard 500 fund, exactly the same as the State Street one. Generally speaking, the money goes to the cheapest fund. And that means overall, the big will get bigger. They'll make more money, and therefore they can lower the costs constantly, again and again and again. So I think the endpoint of this is that it isn't inconceivable that in the foreseeable future, let's say 10-20 years that BlackRock, State Street and Vanguard, but above all, BlackRock and Vanguard, will control the shareholding vote of almost every major company in the world. And generally, this is the oligopoly that benefits us in the form of cheaper prices. And I think these asset managers are not silly, they're not evil or anything like that. They generally do try to use this power cautiously and for good. But I don't feel comfortable that they should be the ones that set what is cautious and good. I don't feel entirely comfortable that kind of concentration of corporate power is in just a few hands. And I think this is one of the points of attack that a lot of index fund fans and people that work at them will quite be, after a few drinks admit that, they can kind of see why people get a little bit antsy about this aspect.
Abraham:
So is this an extension of the common ownership theory that you alluded to in your book? Which is they find some evidence in the airline sector that, you know, airlines start to not compete aggressively with each other because they have the same shareholders. But this does seem to play out in all those sectors, right? And indeed, even in the airlines' sector, you know, actually if you look at the number of companies dying. You talked about this in the book where you said, well I think it's Richard Branson, is how do you become an airlines millionaire?
Robin:
Yeah, it's…
Abraham:
I mean, to what extent is this true that companies wouldn't compete with each other because they are all owned by index funds. And so that has some consequence on capitalism overall?
Robin:
Well, it’s true that it is a tough world and a high bar to clear, right? I mean, it is very unambiguous truth in the world. I think I see the common ownership theory as another facet or an example of this fundamental concern about bigness, gigantism in many industries like we don't feel comfortable that the social media companies are kind of oligopoly companies as well. The common ownership theory, specifically because it is one of the most potent attack points, is that the idea that if you have an airline A and an airline B, and they know that all the owners in both of them are Index funds. Will that, it is not that the argument is not that index fund managers like BlackRock and Vanguard get together once a year and say, “Well, let's make sure our companies don't compete because that will drive down profits for everybody.” It's more that, will you, as a chief executive or CFO or a board feel slightly subconsciously less inclined to compete? If you know that all your biggest owners really don't care because they're going to be your biggest owner no matter what, because essentially they are index funds, and they buy everything in the index. The airline example is a good one because it has some really good data on it. I think you can show a lot of things with data unfortunately. I find it, it struggles for me, the common sense test and also the fact that because index funds kind of own a slice of the entire economy, if there was any anti-competitive effect, they would be hurt by that. For example, if airlines kept prices artificially high because they make more money that way and index funds make more money, well, then hotels would suffer right. Other travel parts of the travel economy would suffer because airline prices were unfairly high. So I am unconvinced as it stands today, but I definitely agree that at least in theory, it is eminently possible that there could be some sort of on the fringes, dampening impact on the dynamism of capital if f index funds become even more imperious. Like again, it's a bit like the doom, index funds wreck the efficiency of markets. I am unconvinced as it stands now, but I don't think we should ignore the fact that the least it's theoretically possible because then at least we can maybe try to get ahead of the problem a little bit and address it. At least the common ownership theory is something that people are debating a lot in, you know, policymaking circles and the investment industry itself.
Abraham:
The thing I think about this is, if we define capitalism just as public markets, I can see this being a problem. But you have huge amounts of money today in private markets. You've written about this. Also funding, you know, startups and you know, all the things that you have a lot of money in the venture, you have a lot of money in private equity. So the way of thinking about this, if we think about capitalism in its entirety. If this scenario that you talked about of course and, you know, a large public company becomes so lazy because they're run by the same shareholders. Surely what we've seen in recent times is that private money is going to flow into private markets, which is going to fund all of these very aggressive big scaling private companies that are going to compete and ferociously with the public companies. Now these private companies will end up in the hands of the index investor anyway. So I'm sorry, Robin, I'm sitting here and thinking, what have I got to lose?
Robin:
No, I mean, it's true. Look, I mean, there are barriers. It isn't so easy to say, well, the kind of the airline companies are terrible…I'm just gonna start a new airline. That's difficult and requires capital and all that. But I agree that this is fundamentally the reason why I am, as it stands, unworried about like the negative side effects of index funds. Net net overall at the present time because, markets it's a case of capitalism. You know, they're not that popular these days. And I'm Norwegian, I'm a Social Democrat. So I think, you know, we need governments to step in when markets fail and all sorts of things that can go haywire. But they kind of do work in the sense that the very dynamic, like if there are if suddenly index funds do consistently start ruining markets, there will always be some active managers that will profit from taking advantage of that. If being a public company is essentially a way to laziness, corporate laziness and sloth. Then yes, there are plenty of private equity firms and big investors that will take advantage of that, either by starting it better or buying you and taking you private. So I just think that it seems a lot of the people that criticize index funds seem to have a, despite being pro-market people, tend to have a very low impression of what markets actually can do and how good they are. This is exactly what they do, right? They are dynamic, they're ever-changing and they're not static. They can blow up and they can cause all sorts of havoc but broadly speaking, it kind of works this way. So I think it's like I said, I think that way too many index fund fans, the kind of fanboy stands that treat it like it's a football team. Like, I support Liverpool no matter what and every player, they are the best player in the history of the world ever and I'd marry Klopp if I could like. I might believe that as a Liverpool fan. But, you know, Man United fans think the same kind of thing, right? And I feel with index fund opponents, the people are kind of always slamming them. They also again kind of get sucked into this way of thinking that, OK, I think index funds are bad and that's fine, that's OK. But then they must always over exaggerate every piece of evidence or every paper, every factoid that might support them, and ignore everything else. In the same way, fans tend to kind of shrug off anything negative, and the world we know it's more complex than that. So why do we need to do this in every walk of life? Why can't you like Kanye West and Taylor Swift? Why can't you be a fan of indexing fans and see the downsides, right? So that's how I think about these things.
Abraham:
Brilliant point, well made. Well, look, I want to talk to you very quickly about ESG and index fund ESG. You know and personal indexing. So all these three put together. You started to tell this story in your book about how the index fund found itself in the midst of, you know discussion about this tragic shooting in Parkland, Florida. You know, as an example of, you know, one of these potential negative impacts of the index fund. You know, that did kind of just buy everything, including guns and gun manufacturers. And what we've seen, though, so I want your thoughts on that. We've seen, though, is that you know, the index went up kind of gone a step further and said, “Well, we're going to launch”, index funds that ESG funds, right? So maybe excludes certain things like gun owners and pornography and all that stuff, and they're getting better right. Again, somebody still has to define all these criteria that you put in. But then there is, you know what we started to see now, which is possible indexing, this idea that, “hey, I can take S&P 500, right? And I can do it to a degree overlay my views on it and the things that I don't like for my personal values point of view, right?”. You know, so when people talk about ESG, I say it's idiosyncratic. You know, so in other words, we broadly all agree on the environment. But the s, for instance, I might say, well, I want to get rid of gun manufacturers and all the big companies. We all would acknowledge the inflationary pay would go there, but it would be different from other people. So my point is that, do you see ESG and indexing play out? And do you see personally in that scene, basically as a tool to solve these problems in one single fell swoop? Do you see that?
Robin:
I have to admit on ESG, I'm a bit of a heretic. In that, like, despite being kind of a nice, liberal left social-democratic Norwegian. I'm old-fashioned enough to think that this is an issue for our elected politicians, not financial, privately-owned financial companies. So look, I get the sense, the importance of ESG, and I kind of I was a fan initially because it felt like, look, some of the challenges we're facing on the social side, the government side like the idea that you should have independent boards kind of a boring point but kind of an important one. And the environmental crisis is big enough that kind we need to not just pull two or three levers, but all the levers that are at our disposal. And I got that at the beginning, but I feel ESG has escalated into this monumental marketing bolt, that like, essentially it's become a marketing ploy rather than something that is serious. And the data used around the by the E and the S and the G is all over the place, right? It's just it's incredibly messy. And also sadly, like even if we get better at data and then we get some more rigorous standards. One thing we do see through human history is that as soon as we have a metric, humans figure out how to gain them. Whether it's credit rating agencies or index inclusions or accounting rules or ESG ratings. I mean, already this is going on right. And also the danger, I think I'm less convinced. I don't think this is going on, but I think like ESG is actually damaging the fight on these things because I still people can chew gum and walk at the same time. But I think there is a danger, at least a slight danger, that ESG becomes a distracting issue from fundamental stuff that has happened. Like the cost of energy usage has to go up. Now, no politician wants to say, no activist seems to want to say that we just need to double electricity prices. Flying to Costa del Sol or New York is just going to have to get more expensive. Everything is going to have to get more expensive because everything that consumes energy has to get more expensive and that's how we deal with it. Stuff we don't want, we want less of, we ban or tax essentially. So instead, we're kind of fiddling around the edges by saying, “well, you know, BlackRock should sell out of like coal companies”. So BlackRock sells coal assets to another private company…that still produces emissions. It does nothing. It just shifts basically the emissions from one part of the economy to the other one, the private companies that you mentioned. So I think it is having very little of an impact, and I'm not even sure if it's making people feel better about themselves. But I think maybe on balance the one area. It maybe is just heightening attention around this. For example, yes, companies are accepting, admitting and owning up to how they might have benefited from slavery in the past or something like having a split board, not having your CEO be a chairman, which is still common in the US and is considered corporate governments faux pas in the rest of the world. The environment like the idea that actually, yes, some forms of coal are pretty bad, some are horrific, and we should definitely be discouraging ownership and raising the cost of capitalism in these areas. But I do agree that actually, I think custom indexing, direct indexing or personal indexing could potentially be the solution to this because it takes these kind of decisions out of the hands of an asset manager that has to come up with like 50 different flavours of everything and says, “here's a product you choose your own index”. So if, for example, you don't want to own this Swiss bank because of the role it played in the Holocaust or this arms manufacturer or this tobacco company, or maybe you hate American Airlines or BA because they dump you from a flight and you bear a grudge, right? I mean, you can express your own personal views through these custom indices, but essentially you get all the S&P 500 funds or the FTSE 100 companies and so on, and you just kind of tick off things. I think in practice, it's going to grow huge, but it's not going to rival the mainstream indexing just because the vast majority of people are not like you and me. I mean, even I probably won't be bothered to, like, sit there and say, if you got like a Russell 3000 index fund and picking and making decisions about 3000 companies. That just sounds like a massive headache. And also, if you do it too much, you kind of take that always blurry line between active and passive management. This might wipe it out completely, like at some point, you just are an active stock picker. We know how well that runs in the long run. Now you might not accept that and I think if you as an individual consumer accepts that I don’t want to invest in the ESG Fund or a custom indexing solution that takes that all energy companies or banking companies and you accept that your returns will over time likely be worse because diversification is getting free lunch in finance, then I think that's fine. But I think right now, a lot of this is being sold with a bit of marketing mumbo jumbo that you can do good and make money doing so. And at some point, I worry people are going to realise that virtue has to be its own reward. You can do this, and think you maybe improve the world by just half a percent, a few basis points. That's fine. That's great. I mean, frankly, we could all improve the world by like half a basis point that would be like meaningful, but you have to accept and be sold and told very plainly, which I don't think is going on now that that comes at a cost to your returns. But at some point, just riding the Tesla boom is not going to make all EV companies and cleantech stocks go up, at some point that's going to drop. So I do worry about what's going to happen when eventually some people realise this. There might be a broader backlash against what the financial industry, the investment industry has sold them under the wrapping of ESG.
Abraham:
This is just brilliant, brilliant stuff, Robin. I can hear my producer, Hana Dickinson screaming “Abrahams stop stop!”. So I am going to stop, but I have to say I have thoroughly, thoroughly enjoyed our conversation. I have thoroughly, thoroughly enjoyed reading your book. I am going to reread it because it's just that good. And s,o thank you very much for your time, Robin. Thank you for your wisdom. Thank you for the good work that you do and for all of our listeners, please do pick up a copy of Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. Robin Wigglesworth, thank you very much for your time, and thank you for coming on the podcast.
Robin:
I'm not sure about any wisdom, but it's been an absolute pleasure to be on. So thanks, Abraham, I really appreciate it.
*Outro music*
Abraham:
I'll be remiss if I didn't thank my incredible team who worked very hard to put this program together, led by my producer, Hana Dickinson. Thank you. Thank you very much, guys. I like to thank our sponsors Timelineapp, the retirement planning software, and Betafolio, the high-tech, low-cost flat fee, model portfolio manager. And to you, our listeners, thank you for your time. I hope you've had as much fun listening to the program as we have making it. You can find more about the show at retirementals.co.uk. And you can follow me on Twitter, my handle is @AbrahamOnMoney. Until next time, thank you and goodbye.