Still, most other fund groups paired mutual funds with for- profit management companies. During the bull markets of the 1950s and 1960s, investors began to gravitate toward flashy funds run by managers who promised market-beating performance. In 1969 MIT and a sister fund joined the crowd by demutualizing and starting a for-profit management firm called Massachusetts Financial Services that promptly began raising fees. The mutual had gone out of the mutual-fund industry.
It came back six years later as the result of a power struggle at another venerable mutual-fund group, Philadelphia- based Wellington, home of the Wellington and Windsor funds. Wellington Management had merged in the 1960s with a fast- growing Boston fund manager. Things turned sour during the bear market of 1973 and 1974, and the Boston partners voted to oust Wellington’s president. This fellow -- his name was, and is, Jack Bogle -- still had a lot of loyal allies on the boards of Wellington’s mutual funds, so he arranged a coup, with the funds taking charge of their own destiny as the Vanguard Group. They still paid Wellington to manage the money in the Wellington and Windsor funds (and they still do), but Bogle soon came up with an alternative, the first unmanaged index fund for individual investors.
From these opportunistic beginnings emerged a financial juggernaut built around the organizing principle of trying to reduce expense ratios instead of trying to beat the market. Bringing in more assets to manage allows Vanguard to lower its expense ratios, which helps attract even more assets. In this way Vanguard has grown to be the world’s second largest money manager. (BlackRock is No. 1, due to big acquisitions as well as organic growth.)
Vanguard is run on behalf of its customers, who also happen to be its owners. It has revolutionized the money-management business, putting pressure on competitors to lower fees. Those lower fees have in turn made it easier for millions of Americans to save for retirement and other goals. It’s a virtuous cycle that has both changed investing for the better and brought the mutual-fund industry back closer to its roots. If the IRS or the courts decide to go after Vanguard for its frugality, it would amount to throwing all this into reverse.
The only possible countervailing public-policy argument that I can think of is that the owners of Vanguard funds are more affluent than Americans in general, so by forcing Vanguard to charge higher fees and then taxing the resulting profits, the IRS and the states would be doing their part to fight income inequality. But Costco’s customers are more affluent than Americans in general, too, and I don’t see anyone arguing that the IRS should force it to charge as much for its products as other stores do. That’s because it would amount to saying that competition on the basis of price shouldn’t be allowed. Which sounds awfully un-American.