(Bloomberg) - It’s official at last: the Age of Bogle is over.
A half-century after John “Jack” Bogle founded Vanguard Group, the roughly $9 trillion fund giant is doing what once would’ve been unthinkable: hiring an outsider as its chief executive officer. And from archrival BlackRock Inc., no less.
To many, the House of Bogle handing the reins to Salim Ramji, a longtime BlackRock executive once considered a possible successor to BlackRock chief Larry Fink, sends a clear message: Vanguard, great popularizer of the low-cost index fund, has reached a pivotal moment in its storied history. On one hand, Vanguard has never been a bigger force in the passive investing world it helped create. But with the battle to win investors’ cash intensifying and after years of internal dysfunction within the fund giant, pressure is mounting to cut costs and deliver results.
It’s difficult to overstate how profound the shift is, or what it could mean at its core for Vanguard and its 50 million customers. Only three executives have led the private company since Bogle retired a quarter century ago, and all three of them worked for him first.
Interviews with more than a dozen former employees, almost all of whom spent more than two decades at Vanguard and spent at least part of their careers working with the previous CEO, Mortimer “Tim” Buckley, paint a portrait of an organization already in the throes of a once-in-a-lifetime transformation.
Quirky Culture
Even before Tuesday’s news, Bogle’s company — an insular place where people often spent their entire careers without ever worrying about job security — was receding into the past, say the ex-Vanguard employees, almost all of whom departed in the past few years. In its place has come a new Vanguard, one where loyalty is negotiated, performance is paramount and mistakes can be costly.
At a certain point, of course, change is inevitable everywhere. Jack Bogle died in 2019, at age 89. When Bogle ran Vanguard, the company — owned by its member funds, which in turn are owned by fund investors — viewed itself as the very antithesis of Wall Street. Based in leafy Malvern, Pennsylvania, 117 miles and a world away from Big Finance New York, Vanguard revolutionized asset management by building a business around Bogle’s belief that the average money manager rarely beats the market over the long haul. He advocated simple, cost-efficient investment products that mirrored broad indexes.
That seemingly simple idea turned the asset management industry on its head and spawned legions of investors and admirers, the most ardent of whom call themselves Bogleheads. It also attracted trillions of dollars into Vanguard’s coffers.
In one way, Vanguard is gaining on its main competitor. It’s grown its ETF market share for 20 of the last 21 years, tightening its grip on the industry to roughly 29%, Bloomberg Intelligence data show. By contrast, BlackRock’s stake has slipped from 60% in 2006 to roughly 32.3% now. Vanguard now commands $2.6 trillion in its US-listed ETFs to BlackRock's $2.8 trillion.
But the firm is far more subject to the punishing economics of selling low-cost index funds than BlackRock. Vanguard’s fees are so low that, in some areas, costs have grown faster than revenue.
Now, steady-as-she-goes Vanguard appears headed for a painful round of Wall-Street-ification. Complicating matters, Ramji, 53, will arrive at a time when Washington is watching how index-fund behemoths like BlackRock and Vanguard are wielding their financial might. Their influence at virtually every major corporation – and the risks their enormous size might pose to financial markets – is under a microscope. The Securities and Exchange Commission has emphasized to Vanguard that with greater size comes greater scrutiny (the SEC underscored the point with a visit to Malvern around 2019, according to a person familiar with matter).
Ramji has signaled the old ways will no longer do.
“The current investor landscape is changing, and that presents opportunities for Vanguard to further its mission of giving people the best chance for investment success,’’ Ramji said in Tuesday’s announcement. “My focus will be to mobilize Vanguard to meet the moment while staying true to that core purpose – remaining the trusted firm that takes a stand for all investors.’’
Ramji declined to be interviewed for this story, as did Vanguard executives.
Many in Malvern are still coming to grips with the reality that Buckley is to retire by yearend. That announcement came out of the blue in late February, prompting speculation about possible tension between Buckley and a newly energized board.
For years many Vanguard board members tended to go along with the company’s Bogle-ite CEOs, according to a former board member. More recently, they’ve begun to assert themselves, as financial performance has come under greater and greater scrutiny. (Recent board additions include Tara Bunch, an executive at Airbnb Inc., and Sarah Bloom Raskin, formerly deputy US Treasury secretary.)
Insiders say Buckley, a lifer who joined straight out of Harvard, set in motion many of the changes that are today sweeping over the company and its quirky culture. He prompted howls a few years ago, for instance, by reducing employee medical benefits, only to reverse course because of the uproar. His chief financial officer, Michael Rollings, has tightened up on executive bonuses and compensation overall, according to a former executive.
Outsider CEO
Ramji, a veteran of McKinsey & Co., had been a long-time adviser to BlackRock when Fink brought him in-house for the powerful job of overseeing corporate strategy.
Known among those who worked with him as a consummate strategy consultant rather than a Wall Street trader, Ramji was tapped to run its US wealth advisory business roughly a decade ago, overseeing the distribution of funds to financial advisers and retail clients. It was his last position — leading exchange-traded funds and index investing — that brought him in the most direct competition with his new firm.
Vanguard, looking to build its advisory business into a sort of Engine No. 2 for growth, may have hired Ramji to tap his experience in that area. It’s also been gunning to overtake BlackRock in ETFs, rising to become the second-largest issuer behind the firm. Ramji’s first task should be to win over skeptical Vanguardians and die-hard Bogleheads, analysts say.
“Bogleheads will be sensitive to strategic changes by Salim, because he is the first outsider at the helm of Vanguard, so building their trust should be priority one,” Bryan Armour, director of passive strategies research at Morningstar, said.
Others say they should take comfort in the fact that Ramji has “Vanguard-ian DNA,” including a devotion to low-cost products, as Bloomberg Intelligence analyst Eric Balchunas put it, and could bring fresh eyes to old problems.
Ramji will inherit a company that insiders characterize as overrun by outside consultants and helicopter managers. As it’s ballooned in size, Vanguard has added layers of managers and often instituted new policies on top of old ones, current and former employees say.
The result, according to an executive who recently departed, is an operation that can feel hidebound and slow to react. Many employees say Job 1 is clear: follow the rules and please the bosses.
Veering off script with a client on the phone, for instance, can result in a swift demerit. Racking up too many black marks can sink a career, these employees say.
On Mondays, teams are required to meet with managers and promise to complete a certain number of tasks that week. Daily check-ins follow and often run 45 minutes. On Fridays comes a final check, and if a team member has failed to complete his or her assignments, they can get a demerit for what some insiders refer to as a “red week.’’
The firm’s attempts to diversify into new business lines have yet to bear fruit. Efforts to expand into Europe and Asia have fallen far short of hopes. Likewise a foray into providing advice to the wealthy. According to several former senior employees, some costly initiatives, including updating technology, have yielded results that have been mixed at best.
Allan Roth, founder of Wealth Logic, a financial advisory firm, is a self-proclaimed Boglehead who has written about how Vanguard's website and app proved so unreliable that he all but stopped depositing money there. “Change is good, but the basic Jack Bogle principles must live on,” he said.
“I suspect it will be either a big success or a big failure, and probably nothing in between,” he said of Ramji’s appointment.
Vanguard often rotates managers through departments to expose them to various businesses and promote the Vanguard Way. That worked when so many of those managers were longtime Vanguardians. The system has proven rockier with new arrivals – a group that, for the first time ever, will now include Vanguard’s CEO.
By Loukia Gyftopoulou and Silla Brush
With assistance from Katie Greifeld and Annie Massa
