The titans who democratized investing: A look at the innovations of Ned Johnson and Jack Bogle

April 6, 2022 2:03 PM

One came from an upper-class background, taking over his father’s mutual fund company and turning it into one of the most recognizable names in the investment business. The other watched his family and its financial well-being destroyed by the Great Depression and vowed to devote his life to serving the everyday investor.

Ned Johnson, who died March 23 at the age of 91, in 1971 became chairman and chief executive officer of Fidelity, the mutual fund company his father founded 30 years earlier. Jack Bogle, who died at 89 in 2019, founded Vanguard in 1975 based on a philosophy of passive investing that tracked an index rather than relying on active management.

Their beginnings may have been different, but they had a similar goal – to bring investing to the people — one with a series of innovative moves that allowed people to make investments and access their money on their own, the other by cutting costs.

“One made investing easier, the other made it cheaper,” said Donald Calcagni, chief investment officer at Mercer Global Advisors in Denver.

We examined the ways each made investing less intimidating, helped people save for the future and the legacy each man has left. Scroll down to see how each contributed to making investing a part of the lives of millions.

Fidelity opens the door to investing for millions of consumers

Ned Johnson was responsible for many innovations that made investing accessible even to those who knew nothing about it. The money market fund was launched in the U.S. after being approved by the Securities and Exchange Commission in the early ’70s. They were not FDIC-insured, but offered an alternative to bank savings accounts, where interest at the time was capped at 5.25%. But it was time consuming for people to sell shares in the funds and access their money. Johnson made it easy, offering a check-writing feature people could use to withdraw money.

Johnson also pioneered the sale of mutual funds directly to investors rather than through brokers and wiped out the sales charges that were common in the 1970s.

“Mutual funds (many years ago) were sold, not bought,” said Jack Ablin, chief investment officer and founding partner at Cresset Capital in Chicago. “People didn’t know what fund they wanted. Their broker told them, and they went along with it. But Fidelity flipped the script, created a brand and portal where people could go directly to Fidelity and actually buy mutual funds, taking the broker out of the equation.”

Ablin noted that Johnson also lowered minimum investment levels and made it easy for investors to swap between funds.

Vanguard fired the gun — and the fee-war race to zero was on

For Jack Bogle, it was all about cutting costs. Vanguard’s website says its average mutual fund expense ratio is 83% less than the industry average. Its cost cutting started a race to the bottom when it comes to fees.

Vanguard, unlike Fidelity, is owned by its investors. It is not a profit-making entity. “That gave Vanguard a competitive advantage on pushing down fees,” said Calcagni. “If not for Bogle, investment expenses today would still be pretty high.”

Johnson takes charge of the movement toward retirement savings

IRAs were made available to all workers and their spouses by the Economic Recovery Act of 1981. The 401(k) plan got its start when Congress passed the Revenue Act of 1978. Section 401(k) gave employees a tax-free way to defer compensation. Johnson introduced 401(k) retirement plan management and became the largest player.

“Fidelity popularized the IRA, and to this day it has the dominant market share in employer-sponsored 401(k) plans,” said Calcagni.

Ablin said the 401(k) market was a big growth engine for Fidelity and a feeder for their actively managed mutual funds.

Bogle, running a non-profit enterprise, gets the altruism award

Ablin said Johnson was about bringing access to the masses, but with his products, there was a profit motive. “Bogle was more altruistic, you could say. He was nonprofit and was looking to bring low cost, not just access,” he said.

But since the death of Bogle, said Calcagni, Vanguard’s management team is more focused on bringing in revenues. “You can only go to zero (on costs),” he said. “But you need revenues to invest in research and innovation, and many top managers are looking for for-profit entities they can own stock in. Longer term, I’m a little concerned about whether Vanguard will attract top talent."

Johnson made Magellan fund manager Peter Lynch a household name

Peter Lynch famously managed Fidelity’s biggest fund, Magellan, from 1977 to 1990. He averaged an annual return of more than 29%, double the returns of the S&P 500 during that time. The assets of the fund rose from $18 million to $14 billion during his tenure.

But since Lynch’s retirement, the fund has failed to match that performance, calling into question the wisdom of relying on a superstar manager. “I’m not sure how much of an enduring impact Lynch will have,” said Calcagni. “That performance is not repeatable.”

Bogle has a fan club

The Bogleheads can be found at Bogleheads.org. They are a group of investors who follow Bogle’s investing philosophy. They have an online forum, a podcast and have published several books.

“Jack had a huge cultural impact,” said Calcagni. “Ned shunned the spotlight, but he ran a highly successful business. Jack had a seismic impact on how investors invest.”

The stage was set for the growth of both Fidelity and Vanguard

In the 1950s, academic research began to emerge challenging the notion that active managers could beat the market. Calcagni said he believes the work of Eugene Fama at the University of Chicago helped lead to the launch of Vanguard and Bogle’s index-investing philosophy.

As for Fidelity, Calcagni said Johnson was among the first to see the implications of the dollar no longer being tied to the price of gold as of 1971. “Interest rates began to rise, and people wanted more interest on their cash,” he said. “That’s when Ned came out with the money market mutual fund with the check-writing privileges. A lot of trends that started before the ’70s led to the birth of Fidelity and Vanguard.”