The transcript from this week’s, MiB: Robin Wigglesworth on the Rise of Indexing, is below.
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RITHOLTZ: This week on the podcast I have a special guest. His name is Robin Wigglesworth, and he has a brand-new book out called “Trillions,” all about the rise of passive investing and indexing. I thought I knew a lot about this space having covered Vanguard, BlackRock, State Street, having interviewed basically all of the CEOs of Vanguard, people from BlackRock, Jim Ross from State Street, Jack Bogle, all the DFA folks. I mean, I — I feel like I really know this space, and I learned a ton of new stuff from the book.
It’s deeply researched. He spent a lot of time doing a deep dive into the area. I was kind of surprised by a number of things. If you’re remotely interested in the rise of passive and indexing, and all the academic background, and how that translated in the real world into the practice of — of investing, well, I think you’re going to like this book and you’re going to like this conversation.
With no further ado, my interview with the FT’s Robin Wigglesworth.
VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest this week is Robin Wigglesworth. He is the Financial Times’ Global Finance Correspondent, residing in Oslo, Norway. His focus is the biggest trends, reshaping markets and investing, including technological disruption and quantitative investing. But more importantly, he is the author of a fascinating new book, “Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever.”
Robin Wigglesworth, welcome to Bloomberg.
WIGGLESWORTH: Thanks, Barry, so happy to be here.
RITHOLTZ: I’m happy to have you. Let’s start with a little bit of background about you and your career. How does one go from the London School of Economics to the United Arab Emirates? Tell us about how that happened and — and how that led to a career in journalism.
WIGGLESWORTH: It’s basically happenstance. I thought I always want to be a physicist, but realized eventually that I — you know, I was good at numbers, but not good enough to be anything other than a mediocre physicist, and journalism sounded interesting. And I studied journalism, but didn’t actually like that that much, so I did a master’s at the LSE in International Relations and Political Islam. You know, it was very much the — the topic of the day.
And I was working (inaudible) at The Guardian, just doing online, putting pictures and captions, and things like that. And I saw a job for a financial journalist in Dubai. And I thought, well, you know, I know nothing about finance whatsoever. But, you know, Dubai sounds kind of interesting. I’ve studied the Middle East. This could be cool, so I did that or do my — my service on the Norwegian Army. We saw a conscription over here. So, yeah, I grabbed my bags and — and jetted off to Dubai to cover Islamic finance.
RITHOLTZ: Quite interesting. I totally relate to being interested in physics, but only being a mediocre mathematician, so they went that. So, you’re in Dubai. What was your first big story?
WIGGLESWORTH: A day after I landed I interviewed the local sheikhs about Islamic reinsurance, which is as esoteric as it sounds. So Islamic insurance is actually called Takaful, and Islamic reinsurance is called a Retakaful. And it’s actually got a quite cool interesting twist to it. Fundamentally, Islamic finance is all about risk-sharing that you’re not supposed to get money for nothing. So famously, interest is banned, “haram” under sharia.
So, there were various workarounds. There — that range essentially from gimmicks to actual theories, interesting mechanisms to make sure that people share in the risk and reward equally.
And it was fascinating. I was petrified. I knew nothing about insurance, reinsurance, and certainly not Islamic reinsurance. But, you know, it just — it fascinated me.
I loved learning about new things. And here I was getting paid to learn about something new and interesting from interesting people. So, I — I fell in love with journalism that day and have never left and — and never will leave the industry.
RITHOLTZ: Really quite interesting. So, let’s talk a little bit about journalism. The F.T. is printed five days a week, that’s right? There’s no weekend edition. The — the New York Times is seven days. The Wall Street Journal is six days. What’s it like having to shove all that content into the maul that daily beast? How — how much of a stressor is needing to keep the beast filled?
WIGGLESWORTH: Well, it’s actually a lot of fun. I mean, it’s stressful, but it’s not stressful compared to a lot of other jobs out there. My wife is a nurse. She used to work in a cancer ward. That certainly helps give her a bit of perspective.
RITHOLTZ: Sure.
WIGGLESWORTH: And — and — you know, and my — my first job is sort of a — a big mainstream organization. It was Bloomberg News. And that’s (inaudible) a competitive, driven organization and, you know, is very much oriented around news and, yeah, feeding the beast and getting stuff out there quickly.
And I loved it. You know, I always joke that, you know, I’ve been at the F.T. far longer now, but if you cut me and I still bleed a little bit of orange and really (inaudible) left its mark. So, you know, these days, actually, my job is fantastically relaxed because I primarily write columns, features, long form stuff, and — and the occasional book when time allows it.
RITHOLTZ: And this was your first book. Did — did you have to stop working to dive into this or was this a side project?
WIGGLESWORTH: Well, it started off as a side project because it overlaps a lot with my day job. You know, I cover passive investing a lot. It’s one of the biggest trends in the markets and finance these days. But my plan was to take a decent chunk of 2020 off to write it. So, I’ve been doing research on an ongoing basis, but writing is something I find, at least long form, I need to devote, you know, a big chunk of time to do it properly.
Unfortunately, when COVID hit, after those plans just completely collapsed. There was no chance I could take any time off work. I was just essentially doing two full-time jobs, trying to home school the children because my wife was not home. She’s a nurse. And yeah, writing this every time I had like a spare evening, a weekend, every holiday in 2020 and perhaps at 2021 went to this book. So, I think it worked, but I think if I’m having to write the book again, I’m going to definitely manage to carve out some proper time off and pray that there isn’t another pandemic.
RITHOLTZ: To say the least. So, you — you’ve been writing about markets in investing for well over a decade. What do you think the investing public doesn’t know about the business of news that — that they really should know?
WIGGLESWORTH: It’s a really interesting question. I get this a lot. In fact, sometimes we discuss it internally. I think one thing that surprises people isn’t purely business-related, but it’s the — the lack of a house view and even, frankly, politics and — and journalism.
I think, fundamentally, most journalists actually just think like journalists. It’s a culture rather than politics. We think …
RITHOLTZ: Right.
WIGGLESWORTH: … in terms of good and bad stories rather than pandering to owners, advertisers, and so on whether many people think it operates.
RITHOLTZ: Right.
WIGGLESWORTH: A lot of what outsiders attribute to ideology or commercial imperatives is sometimes simply the cultural journalism for good and bad. But on the business side, I mean, it’s no secret that running or working at a newspaper is not a great way to get rich these days.
To paraphrase Richard Branson, I think the best way to become a newspaper millionaire is probably to start off as a billionaire and buy a newspaper. But I think where I had changed — I’m a little bit different from a lot of my colleagues is that I’m actually quite optimistic on journalism as in the practice of it as opposed to the business or the future of full journalists because I actually think the quality is getting better on average, not worse. We just have so many more tools at our disposal with so much exciting stuff going on, so I — I try to remain an optimist and I — I still think this is just a phenomenally fun thing to do.
RITHOLTZ: I’m going to agree with you, but I’m also going to credit the non-journalists for forcing journalism to up its game at least in the finance space. Historically, financial media coverage, especially in the 90’s and 2000’s, it was — it was really superficial and a lot of clickbait and — and, you know, just what is the sexiest flashiest thing. And I think a lot of people from — from bloggers to now Substack and newsletter writers forced a reckoning where the major media outlets had to — had to up their game. They used to be pretty mediocre, they’re not. They’re much better than they once were.
WIGGLESWORTH: No, I completely agree actually. I think, you know, the dirty secret is really that nobody use a dream of being a financial journalist when they grew up, right?
RITHOLTZ: Right.
WIGGLESWORTH: You know, I’m no different. I wanted to be a war correspondent. I got to pay a war correspondent for half a year during the Arab Spring when I worked at the F.T. And it was incredibly exciting that just the intellectual stimulation of financial journalism is just incredible.
And I think the financial crisis was the tipping point that before then people ended up in financial journalism because that’s where the jobs were for a long time …
RITHOLTZ: Right.
WIGGLESWORTH: … and they generally paid better than other jobs. But since the financial crisis kind of hammered home to absolutely everybody how essential business, finance, economics, markets are, I — I just see the quality of the graduate trainees we have coming in do so much better than when — frankly, when I applied for jobs. And these are people that want to be financial journalists that actually know and have, you know, expertise far beyond what I had when I stumbled into that conference room to talk to a sheikh about Islamic reinsurance.
RITHOLTZ: I …
WIGGLESWORTH: So, I — I definitely think things are getting better.
RITHOLTZ: Yeah, I — I think you’re — you’re absolutely onto something with that. Let’s talk a little bit about passive investing and index funds. It’s really a well-trodded ground. There’s only so much to say about it. What inspired you to write a whole long history of it?
WIGGLESWORTH: Well, as I mentioned, you know, the — the rise of passive investing was something that I — I was covering maybe not daily, but a lot. It was some of the — the overall backdrop to almost everything I was writing about for a long time when I — when I led the — the market coverage for the Financial Times in New York. And, you know, it was unambiguously this hugely important story that was not just affecting the investment industry. We know obviously the pressures it’s brought on fees, but reshaping how the financial industry works in many ways.
Investment banks are retooling their trading desk to deal with this phenomenon. Markets were functioning and acting differently in the area of passive investing. So, I started scratching around into the backstory of this. I mean, I’m not just a financial nerd become one, I have always loved history. You know, I — I do believe that we understand better where we’re going if we understand where we came from. And lo and behold, the history of the invention of passive investing was just far more interesting than I dear to hope. It’s just filled with these combatative titanic personalities, having huge arguments and getting shunned by their own industry.
So, you know, when — when you’re a journalist, you have a combination of an important story and a fun story. You just — you have everything you need or you — you have everything you should need. And the more time I spent with it I realize that this isn’t just a magazine piece or a long feature, this — this would make, I hope, a — a really gripping book, a way to come explain this huge important trend, but through the prism of these people, and — and what they did and who they were because they were just fascinating people really.
RITHOLTZ: So, let’s talk about this history. As I was reading the book, I was surprised how deeply researched it felt. Tell us how you did this deep dive, how did you want to cover all the little tidbits that you did. Yeah, there’s a — there’s a published history. You have Bogle’s biography and there’s a bunch of other stuff out there, but you really went very deep into the space.
WIGGLESWORTH: Well, I mean, it — it sounds incredibly over the top. You know, I think Newton once said if I’ve seen further, it’s because I stood on the shoulders of giants. And I am no Isaac Newton. But like you say, I stood on the shoulders of many giants that went before me.
So, Jack Bogle famously wrote many, many books. There are many people that have written about parts of this, you know, journalists in Bloomberg have written phenomenally interesting features about the birth of EPS. Peter Bernstein, the financial …
RITHOLTZ: Yeah.
WIGGLESWORTH: … historian has written a really interesting book on — on — on Wall Street in the 70’s and the academic (inaudible) then. So what I tried to do was essentially combine and synthesize all these disparate sources and combine them with just – I mean, God knows, hundreds of — of interviews with, you know, primary characters, secondary characters, other people like to fill in blanks here and there, and just an exhaustive dive through the archives of institutional investor, and pensions and investments in the Wall Street Journal, and combine that into one holistic narrative.
But essentially, it was just a lot of work and juggling a lot of different strands of information and then crosschecking what Person A said versus what Person B said, and what the contemporaneous newspapers might have said at the time because, you know, as — as the cliché goes, success has — has many parents. You know, the index fund is definitely a — a success story, and there are many, many people that after the fact sometimes seek to, you know, paint — repaint history a little bit, maybe to give it a bit of a sheen (ph) that it might not always have had.
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RITHOLTZ: So, I’m going to skip over some of the early history, the Wells Fargo, Samsonite and a lot of the academic history and just fast-forward us up to Vanguard. Because in your telling, it — it almost looks like the index itself was irrelevant.
The — the — Jack Bogle, the founder and first CEO of Vanguard, his Cost Matters Hypothesis almost made the — the group of holdings irrelevant. It was the fees that mattered most. Discuss that a bit.
WIGGLESWORTH: No, it’s a great point. And I — I think Jack Bogle is a far more complicated character than, frankly, he pretended himself and a lot of people see him as. I mean, he was indisputably, you know, one of the great men of history. I mean, he is one of the most incredible people I’ve ever had the — the privilege of interviewing. But I actually think he’s more interesting than he pretended himself because he was not a — necessarily a fan of indexing, not even …
RITHOLTZ: Right, right.
WIGGLESWORTH: … all his time at Vanguard. This was — you know, this is an accident, a fortunate accident.
In his defense, he was definitely always a fan of low-cost investing. That seems to be backed up with his writing going back to days when he was a wonder boy at Wellington. He was a senior executive at Wellington and — and the heir-apparent, Walter Morgan, there. He — and he liked the idea of mutualization where he — he at least had fought of it before Vanguard was set-up and with this unique ownership structure being owned by its own funds.
RITHOLTZ: Let — let me stop you there and jump in because in your telling, the mutualization of Vanguard also seemed like an accident. It was a function of their contract that they previously had with the company they were — with Wellington that they ostensibly were trying to get free from. The idea of a passively managed index was, hey, it’s unmanaged, therefore, it doesn’t violate our manager — no managed funds contract. And the idea of creating a mutual allowed them to escape a — a fee structure they didn’t want to be involved in. Am I overstating that or is that a — a fair assessment?
WIGGLESWORTH: No, I think so. But I mean, so Jack would often after would talk about, you know, strategy follow structure. So, we start with the structure. The reason why Vanguard is mutually owned is not just because Jack Bogle like the idea of mutualization, which he did. But I doubt he would have mutualized if he’d stayed the CEO of Wellington.
RITHOLTZ: Right.
WIGGLESWORTH: But the fact is that he merged Wellington with a hotshot go-go fund manager from Boston in the 60’s. And when the 60’s go-go era ended with a bang, essentially, the other people, as partners, own more stock than he did, and they sacked him as CEO. So as a Hail Mary, he went to the board of the Wellington Funds because all mutual funds need to have their own independent boards and fare at least in the U.S. and trying to argue that they should essentially buy themselves out of Wellington.
And this was — it was a Hail Mary. And frankly, you know, the — the legal representation at the time was very clear that — that the SEC will not like this. Clients can sue us. Wellington can sue us. So as a favor to Jack Bogle, the boards of the Wellington funds, the independent boards of the Wellington funds said that they’ve set-up an administrative company that just did all the clocking jobs, all the paper work for the fund that would be owned by the fund himself, but the investment management, the distribution, the research, the trading, all the sexy part of investment management would stay with Wellington.
But Jack Bogle, basically, this really, you know — first of all, the sacking hurt him and he used this as his platform to essentially get revenge on the Boston Partners that sacked him. And like you say, index funds, he later said that he never even heard of this until he read about it in the Paul Samuelson article. And I think that is, first of all, just factually inaccurate because he — he dominantly wrote an article …
RITHOLTZ: Right.
WIGGLESWORTH: … attacking the (inaudible) index funds anonymously, you know, many years earlier. But he also saw the potential, right? And he saw that this was unmanaged. It was a gimmick. It was essentially a ploy to get out from under the firm of the Boston Partners, and it worked.
RITHOLTZ: Quite interesting. Let’s talk a little bit about State Street. They’re the first ones to market with the SPDRs, SPY, to become one of the largest ETFs ever. Tell us how that came about.
WIGGLESWORTH: Well, essentially, that story starts with Nate Most who is this unusually brilliant eclectic, pretty old by then, Head of Derivatives Product Development at the AmEx. The American Stock Exchange, you know, very old came after the curbside in New York, but kind of found derivatives as a way to kind of try to stay relevant in an era where you had (inaudible) years as a big brother that dominated listings, and Nasdaq was going to be the hot rising exchange, but they still — they needed to find something.
So, Nate Most had the brilliant idea together with one of his partners called Stephen Bloom to basically lift tradable index funds. They thought they might go to somewhere like Vanguard, for example, and get Bogle to list index funds on the AmEx so people could trade them throughout the day because then they might get more customers and the AmEx will get trading revenues.
Now, it turns out that Bogle absolutely hated the idea. It was just anathema to him the idea that you trade a fund in and out all the time. He wanted people to buy a Vanguard 500 fund and hold it forever. So, he turned them down, and Nate Most went to State Street instead. And State Street had a big institutional business in indexing, so they thought, “Well, yeah, we could totally do this. Is it probably possible?” But it took years and years and years.
And ironically, a group of Canadian exchanges managed to essentially copy the — the plans, and they got help from the AmEx because the AmEx didn’t see them as a straight competitor and managed actually the list. This isn’t wide. You know, the first-ever ETF. It’s actually listed in Canada. They managed a just deal head over the State Street and AmEx team because the SEC was very, very slow about this very new-fangled product that had a lot of hear on it essentially. So that’s how that happened, and it’s quite a journey from where it was and to where it is today.
RITHOLTZ: To say the least, then it’s become, you know, a few bps and, you know, the — the interesting story — and I recall this in, I think, the Wall Street Journal a couple of years ago, how did State Street end up losing their lead? They’re — they’re one of the pioneers in the U.S. on both passive and ETF. How did they get dethroned by Vanguard and BlackRock?
WIGGLESWORTH: It’s a great question that actually — look, I — I have an answer in my book, but it is an answer. I think sometimes these things happen, but I think it came down to basically State Street not realizing what it had in its hands. So, you have to remember that this was primarily an AmEx idea, but …
RITHOLTZ: Right.
WIGGLESWORTH: … State Street did because it worked well with their strategy. But index fees on the institutional side were on a massive pressure, so they just didn’t think of indexing as a potential cash cow. They didn’t see the potential of ETFs as these basically lego-like bricks that you can build broad portfolios with. So, they did it and they put some of their money into it. They just didn’t invest enough.
And at the beginning, ETFs was not a great business. Ironically, Barclays Global Investors did also launch through NAFTA. It’s something called WEBS, World Equity Benchmark Securities, which is kind of a copy of — of — of the SPDR that AmEx and State Street did. WEBS and SPDR, that was the intentional gimmick. And they’d also struggled.
But what BGI later did under, you know, CEO Patty Dunn, I think one of the great underestimated CEOs in American corporate history and pretty remarkable for being not just a woman, but also somebody who rose from — to be secretary to CEO and Chairman. She, together with a guy called Lee Kranefuss, realized the potential of this, got Barclays, the U.K. bank, to commit to massive funding, and they essentially did what Silicon Valley today call “blitzscaling.” They basically launched tons of ETFs — just chuck ETFs out there …
RITHOLTZ: Right.
WIGGLESWORTH: … and realize if your first, you can win, you can become the incumbent. So, I think it was a mix of State Street kind of doing fine, but not realizing the importance of what they invented, and BGI eventually realizing it and just chucking resources at it.
RITHOLTZ: So — so let’s …
WIGGLESWORTH: And Vanguard, I think, it later done well purely because it’s Vanguard and they have an enormously positive brand among retail investors.
RITHOLTZ: So, let’s stick with BGI. How did — how did we go from Barclays to iShares to Black Rock? Give us that history.
WIGGLESWORTH: Well, it goes back to the — the first index fund community for my book narrative, of course, that Wells Fargo set-up a new unit called Wells Fargo Investment Advisors, WFIA, to house the first index funds that they did.
Now, the issue with WFIA was that it was filled with lots of brilliant academics. I mean, it’s 1.6 noble laureates consulted for that unit. It was one of the biggest economic think tanks in history, I’d argue, but they cost money and index funds didn’t pay a lot of money. So WFIA was always incredibly brilliant, but didn’t actually turned a profit until the 80’s.
So, then it was taken over. It basically almost came close to collapsing in a battle between WFIA and Wells Fargo, the mothership. But eventually, they hired a guy call Fred Grauer and he managed to turn the ship around just as the U.S. stock market started on the biggest strongest bull run it’s ever had pretty much. And, you know, so there’s a bit of luck and a bit of skill, but then he merged it with a Japanese asset manager, but eventually managed to sell the whole thing to Barclays to merge it with Barclays asset management unit, but essentially just became WFIA 2.0, but under the name of Barclays Global Investors.
That was where WEBS was invented first, and that was a bit of a nothingburger, frankly. WEBS became iShares. And then BlackRock could see where the world was going, where the investment world was going quicker than many other people.
And when Barclays was up the creek without a (inaudible) at all in the financial crisis, Barclays basically had to sell the family silver, and Black Rock was quicker …
RITHOLTZ: And cheap, too, right?
WIGGLESWORTH: … and they pay — were willing to pay more.
RITHOLTZ: Historically, it looks like it was a pretty cheap sale. What — do you recall what is — was sold to BlackRock for?
WIGGLESWORTH: Well, the agreed price was $13.5 billion in cash and equities. So, by the time the deal close at the end of 2009, I think it was the — the final tag that BlackRock shares have gone up was around $15 billion. But yes, I mean, by far, probably the — certainly, the greatest deal in the history of asset management and probably the greatest deal in the financial industry as a whole and possibly — I mean, I’m starting to think of a — such a slam dunk in hindsight acquisition in — in the history of M&A really …
RITHOLTZ: Right.
WIGGLESWORTH: … (inaudible) the history of M&A related with — with car crashes.
RITHOLTZ: Right. Put — put some numbers on it, BlackRock now manages a little over — a little under $9.5 trillion — that’s trillion with a T like the title of your book, and their market cap is — is just under $140 billion. That $15 billion acquisition is really, you know, just world beating. Talk — talk about ROI. It’s quite amazing.
WIGGLESWORTH: It’s incredible. I mean, it’s just — I mean, you can see it on the profits. I mean, BlackRock is more profitable than, you know, Google. I mean, the profit margins in asset management were actually quite good. Despite, you know, the pressure that the industry is under, the dirty secret is that it’s actually quite a profitable industry. And BlackRock is, you know, best-in-class and it is largely, thanks to the acquisition of BGI and it’s ETF (inaudible) iShares and the broader indexing universe. And a lot of the more quantitative investing side that they also inherited along with the purchase, so it’s been incredible.
I mean, you know, basically, the BGI now is just that part. If you split that out, I’d argue that’s probably worth more than all of Barclays today. Barclays is essentially going nowhere, and BlackRock is now bigger than Goldman Sachs in market cap.
RITHOLTZ: Right. Quite, quite amazing. We were talking a little earlier about how deeply researched the book was. How much access did you get because a lot of these figures are still around? They’re — they’re not youngsters anymore, and Jack Bogle passed a few years ago. But a lot of the main characters in the book, they’re still around. Did — did you get access to people like Bill Sharpe, and — and David Booth, and Gene Fama?
WIGGLESWORTH: Yeah. So, I mean, my access was great for the most part. I mean, I genuinely do think most humans are actually quite helpful if you, you know, make sure that you — you impressed upon them that you’re not going to be wasting their time. And some people, like you say, sadly passed away like (inaudible) obviously passed almost a century ago.
Jim Virton (ph) at Wells Fargo was an important figure. He passed away just before I started reporting it. Bill (inaudible) passed away in the process of it. Nate Most passed a few — way quite a few years ago.
And there were some people I won’t name that just didn’t respond to emails or calls or did said the (inaudible) but didn’t want …
RITHOLTZ: You could name them. Who — who — who — who were the difficult people in — in getting the book together? Feel free to …
WIGGLESWORTH: No, I won’t possibly …
RITHOLTZ: … feel free to shame them.
WIGGLESWORTH: … (inaudible), no. I mean, they know who they are. Let’s put it that way.
RITHOLTZ: All right, that’s fair.
WIGGLESWORTH: But broadly speaking, look, I mean, people are busy, and maybe they work on their own book projects, and they want to give away the crown jewels as it were. So, there are many reasons why people declined the interview. And I asked them like, as a journalist, I want everybody to talk to me all the time, but I think, no, you have to be understanding that not everybody feels comfortable with that. And a lot of people were incredibly generous with their time, including Gene Fama I spoke to many times, Mac McGowan, David Booth. Bill Sharpe is an incredibly kind, generous, interesting (inaudible) man. And lots of these people are in their 80’s and some of them are in — almost in their 90’s.
And I swear if I’m half that sharp and half the age, I’ll be a very lucky man.
RITHOLTZ: That …
WIGGLESWORTH: There’s something about finance and economics that seem to keep a lot of people quite young.
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RITHOLTZ: Well, that’s a little bit of survivorship bias in — in the sample set because you’re only speaking to people who are alive — literal survivorship bias. Tell us about something — with — without spoiling the ending, tell us something from the book that was really surprising because I’m going to share a few things with you that I was genuinely surprised about. But what surprised you?
WIGGLESWORTH: I’m — I’m looking for the herring (ph) what you think? I mean, I think the — the Bogle issue that we touched upon was really interesting that he was a far more multifaceted character than I think people realized. And I wish I knew all the stuff I know — now know and could talk to me about it, not because it’s salacious or anything like that, but he’s — he’s become even more of a hero in my eyes because he is more multi-faceted. I think that was really interesting. And probably, sadly, a lot of people only felt comfortable talking about some of this stuff after he passed away in 2019.
One thing that didn’t surprise me the research, but actually have happened almost fortuitously in the middle of writing my book, but it was the — the stress test that happened for the ETF ecosystem in March 2020. I guess, fortunate is a wrong word because, obviously, that was a horrific period for the world. And I will generally worry that we were going to have a — obviously, we’re having a global health crisis and an economic crisis, but we are perilously close to having a financial crisis on top. And especially, bond ETFs came under a massive pressure.
And before the fact, I would have predicted that we would’ve had serious breakages. But I was actually positively (inaudible) by the resiliency of bond ETFs in March 2020. And I know a lot of people don’t agree with me on that, but I think that was one of my big takeaways that I moved from quarter-skeptic (inaudible) cautious optimist on — on ETFs and credit ETFs to being more wholehearted behind that this is actually a — a more resilient supple product that people sometimes give it credit for.
RITHOLTZ: So, first, you’re a 100 percent right and the proof is in the pudding. The people — and we’re going to talk a little bit about some of the criticisms of passive, and indexing, and ETFs in a bit. But if ever there was an opportunity for — for those vehicles to collapse, well, not only did they all survived ’08-’09 fine and the flash crash in 2010 and later, but they came through 2020 – I mean, how many disasters do these products have to live through before people would admit, “Hey, they seem to be robust and resilient. They survived just fine.”
WIGGLESWORTH: Yeah. No, I — I think people look at the Federal Reserve’s intervention, the extraordinarily aggressive intervention as a bailout of ETFs and …
RITHOLTZ: … not even close.
WIGGLESWORTH: … I definitely think like the Fed bailed out markets and they did buy ETFs, but I am increasingly convinced having talked to people about this and been digging around this for a while that we came far closer to mass closure of bond mutual funds — traditional bond mutual funds than we did serious breakages in the credit ETF ecosystem.
Those structures might not be perfect, and maybe the next crisis will reveal some fault line we don’t know about. But I think that nobody can be honestly looked at March 2020 and what happened there. And, you know, people from the Federal Reserve to the Bank of Canada and other people have looked to this, and all comes broadly to the same conclusion that credit ETFs were, at worst, not a contributor to the issues and actually, probably in some respects, help dampen …
RITHOLTZ: Right.
WIGGLESWORTH: … some of the issues we saw in the financial system at the time.
RITHOLTZ: Dampeners is a really good — good word for that. Let’s stay with the book. There’s a quote from Paul Samuelson I really like that you referenced. He ranks the birth of the Vanguard 500 funds alongside things like the invention of the wheel, the alphabet, the printing press, wine and cheese. Is he overstating this a bit? What — that — that’s really — you know, he left out fire, but other than that, how is an index fund comparable to the wheel and — and the alphabet?
WIGGLESWORTH: Samuelson, aside from being, you know, one of the world’s greatest economists. I mean, his — his textbooks are quite literally fill of the textbooks that most economists read. He was the — he was — he was a bit of a joker as well. He like tricking people. So, I think there’s a fair bit of over-the-top wittiness there, but he genuinely did believe that this was an incredibly important invention because you can imagine, you know, sometimes the gains of this are so ephemeral that we — we don’t really focus on it.
But the fact is that everybody on the planet pretty much who have savings has benefited from the indexing revolution even if they don’t invest in index funds. Because of the price competition that they have brought not only can you now put money in an index fund that, you know, I’ve seen people calculate have saved Americans, just in the past 25 years, $350 billion. They have saved all of us trillions of dollars in total feels the average cost of a mutual fund or a hedge fund even has fallen by a third over the past two, three decades. And maybe that would’ve happened without the invention of the index fund, but I — I don’t think so to the same extent. And, you know, these sums are going to be in the trillions.
So, in a small way, but an important way, the invention of this, hey, is helping hundreds of millions of people have a little bit more for retirement than they normally would have. So is it fire or the — the printing press? No, but is it genuinely one of the finest financial innovations in history? And certainly, over the past 50 years, unambiguously, I will say yes.
RITHOLTZ: You know, you’re not going to get any disagreement from me about that. In the U.S., passive has been pretty robust. More than half of the mutual fund and ETF world is now consumed by — by passive. It hasn’t quite caught on as aggressively in the rest of the world, but there are signs that’s changing. Tell us about this as a, you know, not necessarily U.S.-only phenomena, how quickly is the rest of the world catching onto passive as a investing strategy?
WIGGLESWORTH: You know, it’s an interesting theme seeing this become more globalized. I mean, clearly the — the — you know, the — the origin story of — of index funds is — is clearly American. Even though, you know, the — the origin story of — of a pooled investment trust goes back to the Netherlands and the U.K. in — in hundreds of years ago. It has caught on in certain markets, but it depends lots — and this is somewhat technical and dull, but the distribution models.
Take Europe, for example. In Europe, the overwhelming distribution mechanism for investment funds is banks. Banks are the single locus, and banks tend to not want to stay at people into cheap products managed by other people. They tend to stay at people into products that they manage themselves and have pretty hefty fees. So, you can always see there’s a — not perfect correlation but pretty close one between, you know, how dominant banks are in distribution and the adoption of passive.
So, there are some markets where this has gotten pretty far, and there are some markets where there is a lot of quasi-passive. Take Japan, for example. There are a lot of investors there that might not say they — they are passive or this isn’t an index fund, but they are essentially passive. But clearly, this is something that works elsewhere, that there are some markets that are less efficient. Emerging markets are less efficient than large cap U.S. equities, so you can see that active managers do do better there on average before and after fees.
But in the long run, they still underperform the index. So, I think the data is a really hard task master here. And as the data becomes more widely known in more markets, whether China or India or Europe or Norway where I’m based, it’s just going to grow and grow and grow because I — I think there’s a lot of room for money to shift from expensive, on average, underperforming products the cheap passive ones.
RITHOLTZ: Really, really quite interesting. Last question before I share my surprises from the book with you, what sort of pushback did you get? And any (inaudible) decide the people who — who ghosted you and never responded to emails, any of the organizations or individuals push back Vanguard, DFA, BlackRock? Anybody say, “Hey, your conception is — is all wrong.”
WIGGLESWORTH: No, the — they — they were all helpful, but to very varying degrees and at various times. Maybe one organization was (inaudible), “This is an amazing story. Yes, we’ll love to help you tell it.” And then they suddenly ghosted me and refused to answer my emails.
And broadly speaking, as you might imagine, that the chapters that deal with more present-day issues were more sensitive than the historical ones, even though the historical ones were, in many ways, harder to report because, frankly, a lot of the characters had sadly passed away or memories had dimmed sufficiently that it was sometimes hard to piece everything together. But broadly speaking, I have to say, you know, whether it’s a BlackRock or Dimensional, or Vanguard, or State Street, their people were incredibly helpful.
I mean, the journalist lives and dies by their sources and my book would be a pile of crap if I hadn’t gotten so much help from so many individual people sometimes at these organizations because sometimes the organization itself might be standoffish, but there might be other people in there that (inaudible) actually I’m just going to help out anyway. This fundamentally (inaudible) meant that most humans are actually kind of helpful. So, you know, I — I — I cannot fault anybody really on everything.
I’d love people to have opened up their personal email correspondence or letter correspondence going back 50 years. But within, you know, what was realistic, I — I — I don’t have any major complaints.
RITHOLTZ: Really interesting, right. So, I’m going to share two things, in particular, that I was genuinely surprised there in the book. And I kind of knew around this sum of things, but I — I certainly didn’t know all of it. And — and the first was just how really incidental the index was along with the mutual structure to the rise of Vanguard.
There’s no doubt in my mind, Vanguard would have been successful regardless, but there’s an incredible amount of just good fortune that turned Vanguard into a behemoth. Is — is that a fair statement?
WIGGLESWORTH: I think so. I mean, I think maybe the secret here is really that in any success story we sometimes overattributed to the brilliance of the people involved …
RITHOLTZ: Right.
WIGGLESWORTH: … and under-attribute it to just blind luck sometimes. I mean, when I think of my life, I’m sure you can do the same with yours and lots that …
RITHOLTZ: Oh, sure.
WIGGLESWORTH: … we know. You know, luck and serendipity, you can be very good at taking advantage of that break, and Jack Bogle was unambiguously brilliant.
And like you say, you know, he was not going to die a failure almost whatever he did. But a lot of it was timing. I mean, literally, just imagine that Jack Bogle, the reason why he ended up in investment management was just you happen to be at Princeton’s library and reading the Fortune magazine that had an article about this hot new invention called the “mutual fund.” And he thought it was interesting and cool, so he wrote his thesis about that, and that caught him his first job at — at Wellington. And then he got sacked from Wellington by the people …
RITHOLTZ: Right.
WIGGLESWORTH: … he’d merged with.
Imagine if you hadn’t, imagine if Wellington that decided, “No, we are not going to merge with anybody, we’re just going to keep plowing on with our boring conservative funds that looked really unsexy in the go-go 1960’s.” When everybody wanted Xerox and IBM, it was the first dot com bubble.
You know, actually, Wellington would’ve looked really good when the — basically, the 60’s bubble burst in the 70’s because they would’ve looked really steady, and he probably would’ve retired eventually as an immensely successful, but largely anonymous CEO of a major mutual fund company in America. And nobody would really know the name Jack Bogle outside of some corners of finance. So, his sacking actually ended up being the making of him.
And then even when they — when they basically formed Vanguard, there’s so (inaudible) lucky breaks that happened. You know, him just reading an article by Paul Samuelson about indexing when he was sitting there stewing, and angry, and wondering what he was going to do with this new grandiose — grandiosely named administrative company called Vanguard. I mean, it was a company that did paperwork from mutual funds called Vanguard. It had to do something sexy, but he didn’t know what it was until he read Paul Samuelson’s article saying, “Hey, I see lots of really interesting pension plans are doing some interesting stuff around index funds. I wish somebody would do this for other investors.”
What if he hadn’t read that article? So, it is incredible to think about this. And the — I — I love this in all history books, all stories about people really just how much serendipity plays a role in how events turn out.
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RITHOLTZ: You know, to say the — say the very least, we — we seem to often be one random left instead of a right away from the world being very different than it turns out. The second thing I wanted to ask about that I was shocked having interviewed Bogle once and Jack Brennan twice is I had no idea about that fallout. That fall out is really something substantial. And, you know, obviously neither of them advertise it. Brennan still speaks very glowingly about Bogle and the opportunity he created, but that — that really was kind of a surprise how everybody stopped talking to each other.
WIGGLESWORTH: No, it was — you know, people could fall out and good friends can fall out and maybe stay enemies or — or don’t talk to each other for a long time, but this was far beyond that. And I have to admit that I think I have the broad contours of what happened, but the two main people — Jack Brennan and Jack Bogle — have never ever talked not just publicly about this, but frankly to even people that know them.
I spend a lot of time talking to some of the people who are very close to both men, and none of them said they really knew the exact details of this schism. But I think it was incredibly painful for both because they were …
RITHOLTZ: Yeah.
WIGGLESWORTH: … that close. I mean, Jack Brennan played the role that Bogle have paid for Walter Morgan at Wellington before, the heir-apparent, the boy wonder, and he was the yin to Bogle’s yang. Bogle was all vision and charisma and statesman-like behavior, and Brennan was probably again one of the great underrated CEOs of America. Just somebody who everybody I talked to said he was a phenomenal manager, that Vanguard would not nearly be what it is today if he hadn’t taken over at the right time.
But yeah, they fell out. And, you know, I — I have in the book, you know, the broad contours that was Bogle’s heart failure, and he basically couldn’t keep working, so he handed the reins over to Brennan, and then he got a heart transplant and made a miraculous recovery. And when he came back since he thought that he was going to take over the company again, and that ended up with a — a big battle with the board and the board sided with Brennan. But …
RITHOLTZ: And — and he was no spring chicken at that point, right? I mean, it was a mandatory retirement age coming up regardless.
WIGGLESWORTH: Yes, and it was a mandatory retirement age that Bogle had instituted himself.
RITHOLTZ: Right.
WIGGLESWORTH: But I think — I mean, clearly, the board — and this was Boge’s argument. The board could’ve overturned that if they wanted to. The dirty — I mean, it’s not even dirty, I think the obvious secret here that everybody knew at the time and all the press knew, we can see in the subtext of the writing was that, yes, the board could obviously have overturned this, but they thought that Brennan was a better CEO for the Vanguard of that time than Bogle. Bogle …
RITHOLTZ: And — and you do a nice job in the book explaining that, hey, Brennan could not have founded or launched Vanguard, it needed someone who was more visionary. You know, the parallels today are Steve Jobs as the visionary behind Apple, but Tim Cook is the guy who makes the trains run on time, the — the, you know, the operations wizard. That parallel is very much there with — with Brennan and Bogle.
WIGGLESWORTH: No, exactly. And I think it’s — it’s something we see again and again in corporate history that different types of CEOs work at different points of a company’s lifespan. You know, just think of personal relationships. Who you might have dated in — when you’re in your — when you’re 18, 19? It’s not necessarily who maybe should end up married to, right?
And Brennan was exactly that person that Vanguard needed and, frankly, has been running the place for quite a few years before he formally turned over.
RITHOLTZ: Right.
WIGGLESWORTH: The tragedy was that they never made up. Bogle did kiss and make up with the Boston Partners that had (inaudible) decades earlier. You had read a story about, you know, Hamilton and Jefferson, and how they made up, and was inspired, and got in touch with them, and they used to hang out together, but he never made up with Brennan even on his death bed. When people — some of their friends tried to engineer some sort of (inaudible) and he refused. And that’s been just tragic.
RITHOLTZ: Yeah, that — that was the single biggest surprise in the book to me also. I — I want to push back on some of the criticism of indexing because let — let me just start off with this Paul Singer quote, “We are always amazed by decent ideas and insights, which are stretched so far beyond their original version that they become caricatures of themselves and sometimes contra-functional.”
So — so that’s a true statement except I don’t see how this applies to either passive or indexing. What’s the beef with indexing other than it’s costing Wall Street a lot of fees? It’s costing big firms to have to provide more services at a lower charge. Other than that, Mrs. LinkedIn, what’s the problem with passive?
WIGGLESWORTH: No, these — it’s the, you know, $20 trillion dollar question now probably, right? So clearly, you know, you cannot entirely disentangle the criticism from the fact that this is essentially cheap simple product being offered in industry that does not like cheap simple products (inaudible) …
RITHOLTZ: Sure.
WIGGLESWORTH: … complexity and expense. But I think — I think sometimes indexing proponents, including me and you, right, we — sometimes it’s too easy to dismiss the criticism as pure sour grapes, right? I think at some point when you — you need to at least try to engage on the factual basis. And I think there are some areas that I think are essentially total bull to criticism …
RITHOLTZ: Right.
WIGGLESWORTH: … or close to total bull and (inaudible) …
RITHOLTZ: So, wait, you — you don’t believe that indexing is a communist plot or anti-American, right?
WIGGLESWORTH: No, I do not. I think it’s very much — you know, it’s a free market, you know. It’s almost the perfect embodiment of capitalism, you know, I don’t think that’s …
RITHOLTZ: What about the criticism that, hey, all these companies know they’re all owned by big indexes so they’re going to get together and conspire to fix prices? I don’t mean the investment companies, but hey, all the banks are owned by the same companies and all the airlines, and we’re going to see price fixing.
WIGGLESWORTH: Yes. So, this is the — the common ownership theory, so it has many practice to it. So (inaudible) I do think this is one of the — the thorny ones. I do not think I am convinced that, you know, these companies — these investment companies are not getting together with portfolio companies because (inaudible) BlackRock and Vanguard own, yes, a big chunk of every major bank in American and every major airline, and every major hotel group, and telling them to essentially fix prices.
As the argument is actually …
RITHOLTZ: Wait, but why — why would they do that? Isn’t there a ton of upside for them in — in their struggling businesses when they want to engage in illegal antitrust behavior because they’re all doing so poorly? I — I mean, the theme — the thesis could be one of the stupidest ideas I’ve ever heard in either finance or legal, that these three giant wildly successful companies who couldn’t care less about the cost of hotels or airline tickets are somehow going to engage in a conspiracy to fix prices. I — I don’t — like I’m looking for some rationality there, and it’s just talk about flinging stuff against the wall to see what sticks.
WIGGLESWORTH: Well, I mean, so boiling it down, it’s about whether incentives matter. And I think that we can all agree that incentives, in some form of fashion, do matter in …
RITHOLTZ: Sure.
WIGGLESWORTH: … how we structure and moderate an economy. And I think I — I completely agree that there is no cartel behavior whatsoever going on. And I think the — the example — the — the perfect example that people have kind of shown in data that kind of struggles in the face of common — just — just common sense is airlines. The idea that airlines, you could see that, you know, whether it’s great crossholding between investment managers and airlines, they seem to compete less aggressively.
The problem is, of course, there’s hardly an industry that’s gone more (inaudible) bankrupt for what half a century than airlines (inaudible) airlines are …
RITHOLTZ: Massive consolidation, whether they’re like four …
WIGGLESWORTH: … (inaudible).
RITHOLTZ: … whether there are four major carriers today, they used to be 14. It’s just …
WIGGLESWORTH: Yeah.
RITHOLTZ: … they — they — you know, that’s the exception that proves the rule. They had to use airlines, but they ignored technology. They ignored finance. They ignored consumers. There’s a million other sectors that they had to ignore because there’s no evidence. So almost randomly, you know, airlines have never been a good business at least dating back to Kitty Hawk, and so think about …
WIGGLESWORTH: Yeah.
RITHOLTZ: … all the airline companies that have come belly up. It shows you if you’re going to use airlines as your example and you’re going to ignore technology or consumer goods or finance, you’ve already lost. You’ve admitted your — your thesis is intellectually bankrupt.
WIGGLESWORTH: Well, I mean, so we need to split out the theory from the — the evidence. And I agree that the reason why these airlines is purely that they had very granular data on the cost of individual lines and competition between hubs and so on, so this is …
RITHOLTZ: Right.
WIGGLESWORTH: … what they had good data for.
The theory is — and again, this is something that, you know, I can — I — I am very much on the fence on and probably leaning to your skepticism, but the idea that if you are a CEO of a company and, you know, your major shareholders are also the major shareholders in all the competitors, does that somehow — even subconsciously dent your willingness to compete aggressively even by a little bit?
Now, I think there are all sorts of other incentives embedded in a CEO job, I mean, just the fact that, obviously, they — their comp is usually tied to a share price. So, if competition makes sense, then they will compete aggressively. But it is within, I think, theoretical possibility that if you are the CEO of a company and your major shareholders are all major shareholders in your rival that you might be slightly on the margin less inclined to compete aggressively. That is at least possible.
But I — I see these concerns as more a manifestation of this — why the concern that the big three — State Street, BlackRock and Vanguard — but primarily Vanguard and BlackRock are just so enormously gigantic now and are just going to get bigger and bigger. And this was, you know, something that bothered even Jack Bogle before he passed away.
RITHOLTZ: So — so to put pieces of pushback on this, and you could see I have spent some time thinking and — and writing about this. The first is everybody wants to talk about the fund industry, but that’s a tiny percentage of the overall assets. Yeah, more than half, 50 something percent of mutual funds and ETFs are passive, not active but, you know, that’s a $20 — $25 trillion-dollar industry out of a 100 plus trillion dollars. The vast majority of stocks, bonds, and other assets are still owned actively outside of funds.
So, within that little group, you’re going to ignore the balance of the ownership structure of your — that — that’s what makes this a fever dream of — of law professors and — and not reality. I mean, the reality is …
WIGGLESWORTH: No.
RITHOLTZ: … most equities are held actively. Majority of funds or passive, but funds are a minority of — of investing dollars. Tell me where that’s wrong.
WIGGLESWORTH: No, no, I — I agree. And like I said, I’m — the reason why I say I’m still on the fence rather than fully, you know, shrugging off this theory, it’s not just a concern about where we are now, but where we are heading, right?
RITHOLTZ: Right.
WIGGLESWORTH: I mean, given the — the economics of indexing, BlackRock, State Street, and Vanguard are already, you know, the biggest and the cheapest providers of index funds and in funds in general. And this is an oligopoly that benefits us in the form of cheaper investments, but they now account for around a quarter of all votes cast, on average, in the U.S. (inaudible).
RITHOLTZ: The proxies are certainly effective for sure.
WIGGLESWORTH: Yeah. And with the next couple of decades, we’re going to be collated at 40, 50 percent given the growth rates. And this is something Jack Bogle not exactly, you know, as an enemy of indexing said that this kind of concentration will probably not be in the national interest. So, I see that the common ownership theory is just one part of a multiheaded hydra that is the — the gigantism that the — the inexorable logic of index funds and economics of index funds means that the bagel become bigger, and at some point, we are going to be in a world where essentially, they control the majority of most major companies in America and even in the world. And …
RITHOLTZ: But to — to get there, we have to ignore …
WIGGLESWORTH: … (inaudible) index funds.
RITHOLTZ: To get there, we have to ignore 2020 and 2021. The past two years have not been about indexing, have not been about passive investment, it’s been about meme stocks, and Robinhood, and actively trading, and buy this, sell that. You know, the — the mindshare that active investing and trading has grabbed from passive since the financial lockdown has begun had — has told you that half the world are — are closet day traders just …
WIGGLESWORTH: Yeah.
RITHOLTZ: … waiting for an opportunity to come out of their spidey holes and start trading. How do you explain the rise of everything we’ve seen over the past two years in the face of efficiency and low-cost of — of the passive side of the world?
WIGGLESWORTH: Well, fundamentally, I — I think hope springs eternal. Everybody thinks and wants to try and beat the index and really want to get rich. And we’ve seen throughout history these — these main years. Sometimes they’ll last for a few weeks and with esoteric corners of the market. Sometimes they’ve been, you know, countrywide or even global such as the dot com bubble famously. And overtime, they — they tend to end always the same way in a massive burst and people get their faces ripped off …
RITHOLTZ: Right.
WIGGLESWORTH: … and there’ll be congressional hearings and so on.
I think this is a little bit different in that there are secular changes in the financial system such as free trading, gamified apps, social media, that means …
RITHOLTZ: Right.
WIGGLESWORTH: … that this is probably going to be a little bit different. At some point, things will settle down, but it’s not going to settle down to what we saw before. But even this year, a year that has, I agree, (inaudible) the past 18 months characterizing some — largely by the — the rise of retail trading, and active funds have actually taken in billions of goals this year …
RITHOLTZ: Right.
WIGGLESWORTH: … it’s more — it’s almost the exception that proves the rule, that even in a year where this has been going on and activists had inflows, for the first time in over a decade …
RITHOLTZ: Yeah.
WIGGLESWORTH: … essentially hundreds of billions of dollars have gone out every year from active funds year after year after year after year, essentially for 15, 16 years since the dot com bubble. And this year they’ve got taken in there, I think, $150 billion. Passive is still taking in, I think, close to $500 billion, $600 billion.
And if you include market gains with sort of saying it’s — it’s gaining market share, it’s growing, and it’s broadening out. Index bond funds, passive bond ETFs, they are not growing, so what was primarily an equity phenomenon is now gaining — setting (inaudible) in far broader swaths of markets. So definitely, this year is all about active, but we know that the data will show that the majority of active managers, at the end of 2021, will have underperformed and over the 10 years — past 10 years, the vast majority of them will underperform.
And the money will keep shifting because a lot of this is on autopilot, target date return funds, pension funds that know the data …
RITHOLTZ: Right.
WIGGLESWORTH: … they will just put money in cheap index funds and forget about it essentially, and do better than most of the active traders out there who sadly, I think, you know, at some point, some of them will become millionaires, but most of them will end up losing a lot of money, and it’ll be very sad (inaudible) 01:04:24.
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RITHOLTZ: If Fama was a big deal and as much as people like saving money and being passive and guaranteeing themselves some beta, you know, the idiot next door buys some hot stock or some crypto coin and makes a ton of money, and suddenly everybody thinks they’re day traders.
WIGGLESWORTH: Yeah.
RITHOLTZ: So — so let’s …
WIGGLESWORTH: Exactly.
RITHOLTZ: … talk — let’s talk a little bit about you mentioned smart beta and factor investing seems to have been struggling over the past couple of years. Value-oriented funds like DFA have seen a performance lag. Value has underperformed growth for more than a decade. How do you put that into context?
We — we thought we saw factor investing and — and the Fama French factors as — as a sea change. Is this going to turn out to be a temporary phenomena or — or — or is this the underperformance temporary?
WIGGLESWORTH: It’s — it’s one my favorite themes. I mean, apart from some passive investing, the quant investing is one my sort of main favorite subjects out there. I think — I mean, clearly, factor investing has fallen out of favor, primarily because — I mean, some factors have done well. Momentum has done well for quite a while, but the big mainstream ones like value especially has had a awful run.
I’ve seen studies that show it’s done the worse. It’s basically financial records began, essentially like 200, 300 years ago.
RITHOLTZ: Wow.
WIGGLESWORTH: And most — most notably, a lot of quant hedge funds, you know, the more sophisticated complex strategies also did suffer a lot in 2020 because we entered an entirely new market regime and models that were trained on existing financial data, essentially, you know, data that didn’t have any pandemics in them just – just couldn’t tackle so they — they — they fizzled.
But I think the broader phenomenon of factor investing and quantum investing certainly is so alive and well because, fundamentally, I do believe the data on these factors is pretty robust. The problem is, I think, that when it comes to the factor stuff, I think for a lot of order investors, the discipline needed to hold onto them is so enormous …
RITHOLTZ: Right.
WIGGLESWORTH: … that the vast majority of people should stick to boring, plain, dumb beater (ph) as, you know, one might call it because, essentially, yes, over a 20-, 30-year period you might do better in a value fund. But, you know, when you’ve got a 10-, 15-year drawdown like we’ve had now, the — the long run — you know, in the long run we’re all dead, right?
RITHOLTZ: Right.
WIGGLESWORTH: It just becomes so difficult to hold on. The reason why these factors work is because of these drawdowns to large extent.
RITHOLTZ: Right. Wes Gray famously said, “Even God couldn’t stay invested in a deep value fund.”
WIGGLESWORTH: No, I think — I think — I think God would’ve bail out a few years ago. I think it’s only a few very dedicated value people (inaudible) left standing in that — in that trade.
RITHOLTZ: So — so …
WIGGLESWORTH: But it has been a good year now, right?
RITHOLTZ: Yeah. No, this year — this year has been good for both — both some value players and some of the quant funds. Let’s talk about that a second. You — you cover quant funds in the F.T. and it kind of seems like, I don’t know, the past 18 months, 24 months coverage news flow on it has really died down perhaps following some softer performance of — of the big quants. What’s going on in the world of quant?
WIGGLESWORTH: Well, I think, broadly speaking, it’s because, you know, I talked about the cultural journalism, right? I mean, we — new is better than old. Bad is better than good, and kind of nothing to write home about is nothing to write about essentially.
RITHOLTZ: Right.
WIGGLESWORTH: So, when quant was considered hot and sexy in fund, and that’s what — where all the money was going. There was natural (inaudible) – lots of coverage on that. And when quant funds had a terrible time in 2020, a lot of them that famously, even Renaissance, you know, the …
RITHOLTZ: Right.
WIGGLESWORTH: … Big Daddy of the quant world had terrible years in many of its public funds. People wrote (inaudible) about that, including me, but now it’s kind of just Jeremy’s (ph) story of — of improving returns. Nothing kind of sensational, nothing that’s going to make the front page of the Journal or — or the F.T. but, you know, it’s just better across the board. AQR, as a big factor of quant fund, is doing better as well.
But for the reason why I spend so much time thinking about this and covering about this is just, fundamentally, when — our investors are going to be using more technology to invest more systematically in the future or less. And I think the direction of travel is just 100 percent clear. So that’s why I spent lots of the time on this because if you want to understand how markets actually function today, let alone how they are going to function in the decades time, you need to understand the quant ecosystem. So, I’m just trying to go where the puck is heading.
I think we are going to see convergence as more and more discretionary people kind of become more quanty, and some of the quants even add a bit of a discretionary overlay that this kind of always a little bit blurry line between systematic and discretionary investing is — is going to get washed out a little bit, I think, in the coming 10 years or so.
RITHOLTZ: Let’s talk a little bit about skating to where the puck might be going. You briefly mentioned direct indexing. What do you think about this? It’s small, but it’s rapidly growing and it’s a very interesting take on the concept of passive investing.
WIGGLESWORTH: No, it is a fascinating trend, and I do actually think it has a great future. People clearly do want customization. I mean, I might make it like it in many, many areas as well. We’re going to use it some of the other parts (inaudible) that makes perfect sense that this is coming to indexing as well.
But I still think that the vast majority of people still want simplicity and especially in their financial products. So you and I, you know, slightly — slightly more interest in these things than the average punch on the street might want to fiddle around with a broad, let’s say, a Vanguard total stock market fund and take away the companies that might do stuff we find reprehensible or maybe American Airlines dumped you from a flight and (inaudible) you’re angry about that or you might want to cut out your employer, right, because you don’t want to have doubled economic risk (inaudible) …
RITHOLTZ: That’s the big one.
WIGGLESWORTH: … your money working there, yeah, so that makes perfect sense. But the vast majority of people don’t want to fiddle around with this, right? I mean, who likes doing their taxes? Nobody.
I mean, so I can see it’s a really useful tool for a lot of financial advisors, but most people are still going to be basically better off and prefer buying broad index funds. So, I see that it can easily become a trillion-dollar thing, but I do not see it as the truth of indexing 3.0 as some people see it nor as a viable genuine competitor in size and scale to ETFs and some traditional index mutual funds. So, it is a huge trend. They’re definitely going to grow. But right now, I feel some of the hype around it is probably people are getting a little bit over their skis.
RITHOLTZ: Yeah, I can see that. That — that …
WIGGLESWORTH: It’s my gut sense.
RITHOLTZ: … makes some sense. So, I’m — I’m intrigued by it, but I — I want to get your take.
WIGGLESWORTH: Yeah.
RITHOLTZ: So, I only have you for a — a finite amount of time. Let’s jump to some of our favorite questions that we ask all of our guests, starting with tell us what you’re streaming these days. Give us your favorite Netflix, Amazon, podcast. What’s keeping you entertained during lockdown?
WIGGLESWORTH: Well, I mean, I just had our third child, so I have to — my sort of entertainment time budget has been a little bit destroyed lately. But during lockdown, one of my — my main guilty pleasures when I actually did have a little bit of time between work, child care, and — and writing the book was actually rewatching Buffy the Vampire Slayer series from my teens.
RITHOLTZ: OK.
WIGGLESWORTH: And I thought it held up really well. It was quite a lot of fun. So, yeah, I still recommend that to people. It still a very — it was a nostalgic guilty pleasure. And recently, I watched Turning Point, the 9/11 Netflix documentary, which is excellent. I knew a lot of the history began, but something — sometimes putting it all in one place together in a nice bow just really worked. I thought that series was really good.
I watched the Loki Marvel series, which was entertaining. I mean, I’ve got kids. I had to get Disney Plus.
RITHOLTZ: Right.
WIGGLESWORTH: On podcasts, obviously, Masters in Business. I heard great things about it. You’ve got fantastic guests, especially today. But Noir and Bizarre is a podcast started by two of my former colleagues at the F.T. I’ve listened a few episodes of that. That sounds really promising. I like a lot of the economic podcasts.
I tend to be more opportunistic when it comes to podcasts. So, when there is a specific topic or guest that I really want to (inaudible) …
RITHOLTZ: Right.
WIGGLESWORTH: … into, if I don’t have it on in the background, it’s more for specific reasons.
RITHOLTZ: I get you.
WIGGLESWORTH: Yeah. And then, yes, essentially, yes. I’m constantly entertained by the antics of my children, which never seem to end, but maybe will at some point and, obviously, I start missing it then.
RITHOLTZ: Tell us about your mentors. Who are the folks who helped shape your career?
WIGGLESWORTH: I wouldn’t — my mentor is such a big word, and I (inaudible) just sort of downplay their — their importance, but maybe who …
RITHOLTZ: Who — who are the influential people who affected you?
WIGGLESWORTH: … (inaudible) — yeah. Well, let’s say three. So, Paul McNamara was my — my boss at my financial journalism job covering Islamic finance in the Middle East. He was a very acerbic guy, and I loved him to bits. And he gave me my first job, and I learned a lot from him. Mostly just that sense of the action during the job because it’s held a lot of fun.
When I joined Bloomberg News, I had a guy called Chris Crookham was my team leader, and he was phenomenal. He was also — he started even more on the — on the gruff and grumpy side of the spectrum, but just a phenomenal editor, a really great guy who, you know, Bloomberg can be a little bit tough at times, and he knew the right time to yell at you and then the right time to sort of take a metaphorical armor on your shoulder. I mean, especially one time I — I made a genuine screw-up, like a huge mistake. And it was — he didn’t yell at me. I said, “Look, I think you know you made a mistake, so I’m not going to say anything more. Go on, have a drink and expense it, and we’ll speak tomorrow.” And I really appreciated that.
And at the F.T., my first editor, the guy that had to beat my copy into F.T. shape was the guy called James Drummond, again very much on the — on the grumpy side of the spectrum, but he was great. And I’ve learned from so many people. I mean, John (inaudible), Gillian Tett, James Mackintosh through phenomenal colleagues to which sadly aren’t with the F.T. anymore. They’ve gone to the enemies at Bloomberg and the Journal and just so many people elsewhere in the industry. And it is really areas where you can just learn so much from people.
Jason Zweig at the Journal, right, I mean, a phenomenal journalist still that just churns out stuff that every time I say I wish I had written that. So, I think that …
RITHOLTZ: Yeah, that …
WIGGLESWORTH: … that my mentors are all the people I read and love they work essentially.
RITHOLTZ: That’s the key line is when — when you see something you say, “Damn, I wish I wrote that.” That’s how you know someone is doing really, really good work. Let’s talk about everybody’s favorite question, reading. What are some of your favorite books and what are you reading recently?
WIGGLESWORTH: Well, I’ve got a backlog because of the work related to my book. Given all the work in 2020, that was the one thing that just had to end like any sort of pleasure reading. But I picked up again the “Emperor of All Maladies” …
RITHOLTZ: Sure.
WIGGLESWORTH: … a book on the history of cancer. It came over a decade ago. My wife still — already read it, but I wanted to read it for a long time, so I finally got around to reading that. I’m almost done. So, I’ve also started reading “The World for Sale” by two former colleagues. History of Busy Commodity Trading (ph) is absolutely fascinating.
I’m very angry at Jack Farchy and Javier Blas for leaving the F.T. and joining the evil Bloomberg death star, but it’s a phenomenal book, so I’m enjoying that. There are many — some 50, 60 pages in.
RITHOLTZ: Really, really quite interesting. What sort of advice would you have for a recent college grad who is interested in a career in financial journalism?
WIGGLESWORTH: Ooh, financial journalism is hard. I mean, read a lot — a lot and maybe develop a niche that — that you know really well because that can help get you your first job. And, you know, this is advice that lots of trolls give all journalists on the Internet. But, you know, learning to code or at least understanding some of those sides is incredibly helpful.
The days when journalism used to hoover up the humanities graduates, I think I over — I think the value of a journalism degree is primarily in the piece of paper saying that you are a journalism graduate, but in practice, it is pretty minimal compared to the practical experience. I’d rather have somebody who, let’s say, studied finance, took internship as a bank run investment fund, absolutely hated it and tried to get an internship at the F.T. or Bloomberg or the Journal. I think that’s far better than having, you know, studied, as I did sadly, journalism, and history, and international relations. It’s worked out for me, but it’s going to become progressively harder, I think, for the next generations of journalists.
And I would — I mean, this is also well-trodden ground, but we desperately need more diversity in journalism. So, I joke a lot that I’m the Norwegian diversity candidate at the F.T. We don’t — we didn’t have one of the Norwegian journalists, but we — we need more people from all walks of life applying and thinking back, raising financial journalism.
So, if anybody is listening to this and is mildly curious, then drop me a line. I will jump on the phone. I will (inaudible) with anybody because it’s something I care quite a lot about.
RITHOLTZ: And our final question, what do you know, about the world of investing, finance, journalism, indexing, quantitative investing today that you wish you knew when you were first getting started 20 or so years ago?
WIGGLESWORTH: Well, aside from maybe if I had a time machine, I’d — I’d travel back and tell myself to buy long-dated (inaudible) Apple calls 30 years ago.
RITHOLTZ: Well, that’s a cheap, this isn’t a — this is less a time travel question and more a process question. What — what have you incorporated into your process now that would’ve been helpful to do, you know, years ago.
WIGGLESWORTH: There are certain things I’ve always been good at, like taking notes, keeping notes, writing stuff down. It’s always been a fairly handy mnemonic tool for me. It helps me remember things. Once I’ve written something down, I remember it pretty well. And I see quite lots of people that aren’t good at writing stuff down, and if it works electronically or otherwise I do that, but that’s not I might give to myself.
I’d say this is very sad and — and tragic, but very cynical and useful. I wish somebody told me this, and it worked in many professions, but every job is sales.
RITHOLTZ: Yeah.
WIGGLESWORTH: It’s — it’s the dirty truth that people don’t want to always say, but every job in sales is (inaudible) sales. And when you’re young, everybody has this realization. Some people realized it in the mid-20’s, some people in their 30’s, maybe some people later. But you always think that, you know, good work will always get recognized.
And it can. Again, you can be lucky or you can be unlucky, but every job is sales. And that is certainly not something I appreciate for a long time. Yes, it’s — it’s not the fun sexy inspiring piece of advice, but it’s probably something that more people could do with hearing.
RITHOLTZ: Thanks, Robin, for being so generous with your time. We have been speaking with Robin Wigglesworth. He is the Financial Correspondent for the Financial Times and author of “Trillions,” a new book on indexing and passive investing.
If you enjoy this conversation, well, be sure and check out any of the nearly 400 prior discussions we’ve had over the past — is it seven years? Yes, since 2014. You can find that at Spotify, iTunes, wherever you get your podcasts.
We love your comments, feedback, and suggestions. Write to us at mibpodcast@bloomberg.net. Sign up for my daily reads at ritholtz.com. Check out my weekly column at bloomberg.com/opinion. Follow me on Twitter, @ritholtz.
I would be remiss if I did not thank the crack team that helps put these conversations together each week. My Director of Research is Michael Batnick. My producer is Paris Wald. My Project Manager is Atika Valbrun.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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