Thursday, May 12, 2022


For fans of indexing and business stories, Robin Wigglesworth’s book Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever is a page-turner.  Although this book is well-researched, it’s not a dry academic work.  Wigglesworth delves into the personalities of the important players who grew index investing to what it is today.

The stories begin with pioneers who sought to bring scientific rigour to investing rather than just rely on the instincts of investment managers.  These builders of index funds faced initial investor indifference as well as scorn from the traditional investment industry.  Index funds were even labeled as “un-American.”

Throughout the birth and growth of indexing, fund managers became increasingly aware of the threat to their incomes.  In 1973, “one anonymous mutual fund manager griped to the Wall Street Journal” that “a lot of $80,000-a-year portfolio managers and analysts will be replaced by $16,000-a-year computer clerks.”  Adjusting for inflation, that’s about $500,000-a-year for fund managers and $100,000-a-year for computer clerks.

Part of the impetus for index funds came from academic work including collecting data on stock returns, demonstrating the random nature of stock movements, and the Capital Asset Pricing Model (CAPM).  Much of this work assumed that stock prices followed the standard bell curve.  However, Benoit Mandelbrot had a “hypothesis that stock returns conform to ‘non-normal’ distributions,” and Eugene Fama proved this in “nauseating detail” in his PhD thesis.  It’s surprising that even today much of the investment industry ignores the reality that stock returns have “fat tails.”

A driving force behind the lowering of investment fees has been a “radical” idea of Jack Bogle’s: “mutualization.”  This is where a fund management company becomes “a subsidiary of the funds that would operate ‘at cost.’”  This solves the problem “that investment companies serve two often conflicting masters, the owners of the money manager, and the clients.”

It’s easy to get lost in the huge dollar figures involved in investing.  We often see millions, billions, and trillions.  The author makes a mistake along these lines with computer memory sizes when discussing the impact computers had on the development of indexing.  “In August 1981, IBM launched its first-ever personal computer.”  It was “puny by modern standards—an iPhone boasts about 250 times its 16K processing memory.”  The correct figure is more like 250,000 rather than 250.

In the story of the first Exchange-Traded Funds (ETFs), we learn about “a bunch of plucky Canadians stealing ahead of Team America to launch the first-ever ETF.”  The author is then quick to offer a series of excuses.  “They managed to do so mainly because of the smaller, less aggressively competitive Canadian finance industry” and “the more amenable local regulator.”  “The attempt was sponsored by the Toronto Stock Exchange, and leaned heavily on the Amex” and “State Street Spider team’s frustrating but pioneering work.”  Indeed, “the US exchange was happy to advise the TSE team on the details.”  The first ETF “tracked only the thirty-five biggest stocks in Canada—far easier than the entire S&P 500.”  “Moreover, the Canadian ETF was only a modest success.”  For the ETF revolution “to really take off it still needed a successful birth in the United States.”  Got it.  Canada was first but it doesn’t count because we had an easier job, stole the idea, got help from Americans, and did it poorly anyway.

As indexing has grown, some now claim that indexing is the cause of many ill effects.  “It is tempting to dismiss many of these concerns as the shrill self-serving scaremongering of industry incumbents coming under intensifying pressure from a cheaper, better rival.”  This is true of most complaints about indexing, but we can’t deny that indexing has some unintended side effects.  In one case, “a Chinese state-controlled maker of video surveillance cameras that had recently been put on a US government blacklist that prevents American companies from doing business with it, was added to MSCI’s flagship index.”  “Republican senator Marco Rubio blasted the decision, arguing that it would cause billions of dollars of US savings to automatically slosh into Chinese companies of dubious quality, and in some cases work directly against American interests.”

For anyone who enjoys business stories and is a fan of index investing, Trillions is an interesting read.  Wigglesworth does an excellent job of bringing the business and personal stories of the major players in the growth of indexing to life.

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