In Billions: How a Gang of Wall Street Renegades Invented the Index Fund and Changed Finance Forever, robin wigglesworth explores the rise of the index fund as an invention unlike any other in recent financial history. Taking the reader on a road trip through the history of financial markets, this readable book will be enjoyed by those who have studied economics and are interested in connecting familiar concepts, he writes. Maria Zhivitskaya.
Billions: How a Gang of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. Robin Wigglesworth. Penguin business. 2020.
Robin Wigglesworth, The financial timesThe global finance correspondent for Focusing on the most important trends reshaping markets, argues in his latest book that the index fund is an invention without equal in recent financial history. trillions tells the story of financial innovation and index investing, told through the intimate accounts of individual ‘Wall Street renegades’ and those around them who made it possible. Index funds are unambiguously presented as a force for good, lowering the fees payable to financial professionals and thus providing 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 percent ($10 trillion) of US-based mutual funds and exchange-traded funds (ETFs), in compared to 32 percent ($4.1 trillion) in 2015. Globally, more than $26 trillion, more than a year’s economic output in the United States, is now held in such funds, which is ‘nearly double the size of the combined private equity, venture capital, and hedge fund industries.’ The fundamental principle of index funds is to be “average.” Most active managers charge at least 1-2 percent per year and fail to beat the market in the medium term: “Statistics vary, but […] only 10-20 per cent of active funds outperform their benchmarks over any ten-year rolling period’ (8). By contrast, index funds charge as little as 0.03 percent to track a large stock index.
trillions It begins with a famous bet between Warren Buffett and New York-based Protégé Partners, a firm specializing in asset management and advice. In 2007, Buffett bet $1 million that no investment professional could pick a portfolio of at least five hedge funds that would outperform a low-cost S&P 500 index fund over the next decade. Active managers with their high fees, Buffett explained, were starting out at a disadvantage and needed to make up for those fees. Buffett argued in his 2016 letter to investors that active managers’ efforts were largely self-neutralizing and that their IQs would not outweigh the costs they charge to ultimate investors (22). Buffett chose the low-cost Vanguard fund and won the bet a decade later, resulting in a charitable donation. Naturally, ‘Buffett argues that being a professional investor is not an impossible task, but he is skeptical that many can succeed’ (16). “The bet is symbolic of larger changes in the industry,” explains Wigglesworth.
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trillions takes the reader on a well-articulated road trip through the history of financial markets from its academic origins before moving on to indexing, mutual funds, ETFs, and responsible investment products. It’s an easy read, told through lively, relatable stories from those involved.
We begin our journey in France in 1900, with French mathematician Louis Bachelier’s random walk hypothesis based on his Ph.D., and over time meet Harry Markowitz, William Sharpe, Eugene Fama, Fischer Black and Myron Scholes, John Clifton’ Jack ‘ Bogle and Larry Fink, who contributed to the evolution of financial theory, paving the way for the rise and triumph of index funds. For those who have already studied economics, this book captivatingly connects the dots between names you are likely already familiar with. There are many Ph.D.s from the University of Chicago, with numerous colleagues in common and a shared desire to innovate at the intersection of industry practice and academia.
The author seems particularly fond of Vanguard and its founder, John Clifton ‘Jack’ Bogle. After earning an economics degree from Princeton University, Bogle began his career in active investing in Wellington, but was asked to resign twenty years later due to a failed merger. This led him to create Vanguard in 1975, now the second largest asset manager in the world. Wigglesworth muses that no one is more religious than a convert: once he was an active manager, Bogle changed his position to become an avid supporter of passive management and created the first index fund available to individual investors. As a mutual organization, Vanguard could operate at cost, returning any profits to its constituent funds, thus further reducing fees for its clients.
Edward ‘Ned’ Johnson, the son of Fidelity’s founder who was responsible for his rise to one of the world’s largest asset managers, observed: ‘I can’t believe the great mass of investors are going to be satisfied with just receiving returns. average. The name of the game is to be the best’ (114). However, Vanguard reshaped the landscape by finding a niche as a low-cost, market-mimicking provider in a high-cost industry.
ETFs were the next significant innovation in indexing, which the book explains in detail. ETFs have multiple underlying assets, but are traded on an exchange just like stocks, so they tend to be more profitable and more liquid compared to mutual funds. Fink, CEO of Blackrock and a member of the “rarefied class of corporate executives referred to only by first name” (234), compares the impact of ETFs to the way Amazon 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 dangers. Much of the book is drawn from various biographies and memoirs, so it could be accused of oversimplification, filled with success stories from brilliant Ivy League graduates. There must have been more missteps along the way than we know about, and it would have been useful to read about them.
Another shortcoming is the US-centric perspective of the book, with European and Asian players barely mentioned. An exception was the call by Simon Pilcher, head of the Universities Superannuation Scheme (USS), one of the UK’s largest pension schemes, to redirect his activities away from conventional active shares, despite the strong performance of his mandates, in favor of thematic quantitative. passive strategies and mandates (274).
Wigglesworth churns out the classic quote that “it’s hard to make predictions, especially about the future,” and then sticks to it by refusing to extrapolate past performance or discuss how index funds or the broader financial landscape might develop. The book presents a readable overview of financial markets through the lens of index investing, and will be enjoyable for those who have studied economics and are interested in connecting familiar concepts. Perhaps Wigglesworth’s next book could include an examination of more recent developments, including the expansion of environmental, social and governance investments, as well as the rise of alternatives and private capital markets.
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Note: This article offers the views of the author, and not the position of USAPP – American Politics and Policy, or the London School of Economics.
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About the reviewer
Dr Maria Zhivitskaya obtained a PhD in Risk Management from LSE in 2015. She now works in the asset management industry specializing in ESG. She also teaches master’s candidates at the Paris School of International Affairs and MBA students at Saïd Business School in Oxford.