Book Review: Billions: How a Gang of Wall Street Renegades Invented the Index Fund and Changed Finance Forever by Robin Wigglesworth

In Trillions: How a gang of Wall Street renegades invented the index fund and changed finance forever, Robin Wigglesworth examines the emergence of the index fund as an unrivaled invention in recent financial history. This highly readable book will take the reader on a road trip through the history of financial markets and will appeal to those with an economics degree who are interested in connecting familiar concepts, he writes Maria Zhivitskaya.

Trillions: How a gang of Wall Street renegades invented the index fund and changed finance forever. Robin Wigglesworth. Penguin Shop. 2020

Robin Wigglesworth, the Financial Times’ global financial correspondent, who focuses on the biggest trends transforming markets, argues in his latest book that the index fund is an unrivaled invention in recent financial history. Trillions tells the story of financial innovation and index investing, told through the intimate accounts of individual “Wall Street defectors” and those around them who made it possible. Index funds are clearly portrayed as a force for good, reducing the fees paid to financial professionals and thereby bringing significant tangible benefits to individual investors saving for retirement and other financial goals.

The rise of index investing is a strong trend in finance – Bloomberg estimates that passive management now accounts for 43 percent ($10 trillion) of US-based mutual funds and exchange-traded funds (ETFs), compared to 32 percent ($4.1 trillion U.S. dollar). in 2015. Globally today, over $26 trillion – more than a year’s worth of economic output in America – is held in such funds, which is “nearly double the size of the combined private equity, venture capital and hedge fund industry” . The basic principle of index funds is “average”. The majority of active managers charge at least 1-2 percent per year but fail to outperform the market over the medium term: “Statistics vary, but […] only 10 to 20 percent of active funds beat their benchmarks over a rolling 10-year period” (8). In contrast, index funds only charge 0.03 percent to closely track a major stock index.

Trillions begin with a famous bet between Warren Buffett and New York-based Protégé Partners, a specialty wealth management and consulting firm. In 2007, Buffett bet $1 million that no investment professional could pick a portfolio of at least five hedge funds that would outperform a low-fee S&P 500 index fund over the next decade. Buffett explained that active managers are initially at a disadvantage with their high fees and have to compensate for these fees. Buffett argued in his 2016 letter to investors that active managers’ efforts were “highly self-neutralizing and their IQ would not outweigh the costs they charge end investors” (22). Buffett chose the low-cost Vanguard fund and won the bet a decade later, resulting in a charity donation. Of course, Buffett “claims that being a professional investor is not an impossible task, but he is skeptical that many can be successful” (16). “The bet is symbolic of major changes in the industry,” explains Wigglesworth.

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Trillions takes the reader on a well articulated journey through the history of financial markets from its academic origins before moving on to indexing, mutual funds, ETFs and responsible investment products. It’s easy reading, told through vivid, relatable stories of those involved.

We begin our journey in France in 1900 with the French mathematician Louis Bachelier’s Random Walk Hypothesis based on his doctoral thesis, and over time we learn Harry Markowitz, William Sharpe, Eugene Fama, Fischer Black and Myron Scholes, John Clifton “Jack” Bogle and Larry Fink, all of whom helped develop financial theory and paved the way for the emergence and spread of index funds. For those who have already studied economics, this book captivatingly connects the dots between names that you are probably already familiar with. There are many graduate students from the University of Chicago with numerous peers and a shared desire to innovate at the intersection of industry practice and academia.

The author seems particularly fond of Vanguard and its founder, John Clifton “Jack” Bogle. After earning an economics degree from Princeton University, Bogle began his career actively investing in Wellington, but was forced to resign twenty years later due to a failed merger. This led him to found Vanguard in 1975, now the second largest wealth manager in the world. Wigglesworth muses that nobody is more religious than a convert – once an active manager, Bogle changed positions to become an enthusiastic advocate of passive management and created the first index fund available to retail investors. As a mutual, Vanguard could operate at cost, returning any profits to its constituent funds, thereby further lowering fees for its customers.

Edward ‘Ned’ Johnson, the son of Fidelity’s founder, who was responsible for growing it into one of the world’s largest wealth managers, commented: ‘I can’t believe that the vast majority of investors will be satisfied with only receiving average returns achieve . The name of the game is to be the best” (114). However, Vanguard has reshaped the landscape by carving out a niche as a low-cost, market-mimicking player in a high-priced industry.

ETFs were the next major innovation in indexing, which the book explains in detail. ETFs hold multiple underlying assets, but trade on an exchange just like stocks, so they tend to be less expensive and more liquid compared to mutual funds. Fink, CEO of Blackrock and a member of the “rare ranks of corporate executives who go by their first name only” (234), compares the impact of ETFs to how Amazon has transformed retail – with lower prices, convenience and transparency as opposed to the complexity and opacity of the wealth management industry.

Wigglesworth celebrates this passive revolution but doesn’t spend enough time on the potential pitfalls. Much of the book is compiled from various biographies and memoirs, so one could criticize it for being oversimplified, full of success stories of brilliant Ivy League graduates. There must have been more missteps along the way than we are realizing and it would have been helpful to read about them.

Another shortcoming is the book’s US-centric perspective, with little mention of European and Asian actors. An exception was the call by Simon Pilcher, head of the Universities Superannuation Scheme (USS), one of the UK’s largest pension schemes, to divert its activities away from mainstream active equities in favor of thematic quantitative investing strategies and passive mandates, despite the strong performance of their mandates (274) .

Wigglesworth churns out the classic quote that “it’s difficult to make predictions, especially about the future,” and then goes along with it, refusing to extrapolate past performance or discuss how index funds or the financial landscape in general could develop. Providing a readable overview of financial markets through the lens of index investing, the book will appeal to anyone who has studied economics and is interested in connecting familiar concepts. Perhaps Wigglesworth’s next book could include an examination of recent developments, including the expansion of environmental, social and governance investment and the rise of alternative and private capital markets.

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Note: This article reflects the views of the author and not the position of USAPP – American Politics and Policy or the London School of Economics.

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About the reviewer

dr Maria Zhivitskaya received her PhD in Risk Management from the LSE in 2015. She now works in the wealth management industry and specializes in ESG. She also teaches Masters candidates at the Paris School of International Affairs and MBA students at Saïd Business School, Oxford.