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How 'Renegades' Transformed Finance With Indexing

The Financial Time’s global finance correspondent, Robin Wigglesworth, examines indexing’s serendipitous beginnings and the innovators who transformed the financial industry.

On Morningstar's The Long View podcast, Robin Wigglesworth discussed his new book that examines the remarkable history of indexing, Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever.

Here are a few excerpts on the unsung heroes behind indexing's rise and the fortuitous circumstances that brought them together from Wigglesworth's conversation with Morningstar's Christine Benz and Jeff Ptak:

Key Figures in the Creation of Indexing

Ptak: There are some very familiar names in this story. Markowitz, Fama, Bogle, Fink, to name a few. Then there are others who played pivotal roles but haven't necessarily entered the financial Zeitgeist in the same way. Which key figure do you think will be the biggest revelation to readers of the book? Wigglesworth: This was one of my favorite things of researching the book, in that, I think most of us know all these names like Jack Bogle, obviously, titanic figure and all that. But I love finding out the people that played pivotal roles behind the shadows. Thomas Carlyle famously said that the history of mankind is the biography of great men, and obviously, at a time when there were just great men that we're talking about. And it's kind of a tempting mental model for us. Even today, Hollywood does this. Batman doesn't have Robin anymore in modern-day Batman incarnations. But the reality is that, even the most titanic people who are great--this isn't to detract from their greatness and what they did--wouldn't have been able to do so without the help of other people.

For every Napoleon, there was a general Jean Lannes or marshals that did the actual war-winning and empire-building. And in the history of indexing, there are lots of people who I wouldn't say have been scrubbed out of history but might be unfairly forgotten. At Wells Fargo, Mac McQuown was a force of nature. But could he have done it without the help of people like Larry Cuneo, Wayne Wagner, Bill Faust, Jim Vertin? At Vanguard, Jack Bogle was the man. But I think Vanguard would have quite possibly failed or at the very least not been the institution it is today without people like Jim Riepe or Jan Twardowski, who matched the first incarnation of the Vanguard 500 Fund. Later Jack Brennan built Vanguard into what we know today. DFA--there were three cofounders of dimensional fund advisors. But they probably wouldn't have survived the early years without Larry Klotz and his salesmanship. He was the guy that basically started and won one of the first clients before getting ousted by Booth and Sinquefield. And more present day, BlackRock, Larry Fink is the modern-day king of Wall Street. But quite a lot of people that know him say that as much as they respect Larry, he probably wouldn't have been able to build BlackRock into what it is today without the help of Rob Caputo, his aggressive, not always popular, right-hand man. So, I think that's important to remember that we sometimes like to elevate certain people above everybody else, but we need to recognize that quite often there are teams and systems that allow great events to unfold.

The Serendipitous Beginning of Indexing

Benz: Another thing that's striking in the book is the role that serendipity played in some of the most pivotal events to take place in indexing. For instance, David Booth might have ended up teaching economics at Kansas University had one of his professors not introduced him to Gene Fama's theories, which led him to pursue a Ph.D. at the University of Chicago and eventually to launch DFA. So, what's another example of a fortuitous pairing or confluence of events that set indexing on the trail that it eventually blazed?

Wigglesworth: Well, there's so many sliding-door moments in the history of indexing. The one that I always return to is Mac McQuown, who was working at a brokerage as an investment banker on Wall Street. But he loved computers and he'd fallen in love with computers at a time when that was seen--and it was even seen as geeky on Wall Street--it was just seen as preposterous. You didn't have engineers, computer scientists in those days. But he moonlighted for a professor he'd be working on as digging out stock market data to see if stock markets can be predicted. And they used this big, massive IBM mainframe in the Time Life building in New York. And they weren't able to find anything. It was essentially a complete waste of money and time. But the local IBM manager of that facility was so interested in that they were trying to use computers in financial services. And this was a time when IBM was trying to get clients outside of some poor accounting firms and the government. So, they paid for Mac to fly to San Francisco--or to San Diego to give a speech about what he was doing. They didn't really care what it was. They just liked that he was a dude in finance; he was using a computer. But in that audience, by complete chance, was Ransom Cook, the chairman of Wells Fargo, and he got so taken by Mac that he offered him basically a job the next day. And what if that hadn't happened. The entire Wells Fargo walk is fascinating because Wells Fargo later became Barclays Global Investors that is now core, basically part of BlackRock. And Mac was the guy that hired the first academics--the Gene Fama, the Harry Markowitz, the Bill Sharpes--as consultants there and created what I see is the world's biggest economic think tank. And you can see that legacy of that think tank that Mac established out of this serendipitous meeting with Ransom Cook in the success for BlackRock today. So, that's kind of fantastic to think about. More recently, Jack Bogle met Nick Morse when Nick Morse was an executive at the Amex trying to count this idea of tradable index funds, and Jack Bogle hated the idea and chucked him out. So, by pure chance, that job, by creating tradable index funds, went to State Street, not Vanguard, and cost Vanguard hugely in what would eventually become the ETF market. So, I think that's pretty incredible as well.

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.

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