Vanguard's New Boss: `Being Famous Was Never On My Agenda'
John J. Brennan has enjoyed his anonymity. But last November, after becoming chief executive of mutual-fund giant Vanguard Group, he discovered that privacy may be a thing of the past. While coaching his young son's soccer team, Brennan was approached by a player's mother who had seen him on a recent Wall Street Week with Louis Rukeyser, his first appearance there. "She said: `I didn't realize you were that Jack Brennan,"' he recalls with a laugh. "She thought I was a gym teacher or professional coach."
Brennan, 43, had best prepare himself for more such encounters. For 15 years, he has labored in the shadow of Vanguard's founder, the legendary John C. Bogle. But Bogle's poor health thrust Brennan center stage. Brennan was named CEO in January, 1996, as Bogle--plagued since his 30s by cardiac problems--prepared to undergo a heart transplant. On Aug. 13, Brennan's ascent was complete: The board gave him the chairmanship, effective January. Although Bogle, 68, has recovered and will remain on the board as "senior chairman," the job of shepherding Vanguard through the increasingly treacherous stock market now lies with Brennan.
TAG TEAM. The move comes as no surprise to those who have watched Bogle and Brennan evolve into one of the most successful tag teams in finance. The quintessential Mr. Outside, Bogle has become an industry icon by preaching the value of Vanguard's simple, low-cost investment philosophy. His assaults on industry practices such as heavy promotional advertising and hefty fees have garnered headlines--and free marketing--for Vanguard.
The more self-effacing Brennan, meanwhile, has been Mr. Inside. Sharing little of his mentor's love of controversy, he has been more interested in running things. Brennan has overseen the rapid expansion of Vanguard's computers, customer-service systems, and other infrastructure as its assets have soared past $300 billion. "Being famous was never on my agenda," Brennan says.
Can Brennan fill the aggressive Bogle's shoes? He probably doesn't need to be the tree-shaker Bogle has been. Thanks to Bogle's promotional tactics, Vanguard's image is firmly set. Says James S. Riepe, managing director at rival T. Rowe Price Associates Inc. and a onetime Bogle aide: "Vanguard is more than any one person now."
That's one reason Brennan promises few changes in a formula that has worked so well. Over the last decade, Vanguard's low-cost, high-return approach has helped it gain ground on industry leader Fidelity Investments, which now manages $552 billion in assets; since 1993, Vanguard has ranked No.2 among fund families.
The two fund families couldn't be more different in style, fueling a fierce rivalry between them. Vanguard specializes in index funds, which often outperform most actively managed funds. Bogle's trumpeting of that record has drawn scads of new investors. By contrast, Fidelity heavily promotes its star stock-pickers and big-name funds. Though neither Bogle nor Brennan ever mention Fidelity by name, Bogle's criticism of high-cost management clearly irks Fidelity.
Still, in performance terms, there's little doubt Vanguard's formula has served investors better of late. With an asset-weighted average return of 97% over the past three years, says retirement-plan consultant Kanon Bloch Carre, Vanguard's U.S. stock funds rank third among the top 42 fund families it tracks. Fidelity ranks a middling 21.
Whatever Wall Street does, Brennan believes Vanguard's commitment to low costs is its big edge in keeping returns up. The company does little advertising and has no network of retail centers to push its funds. So the cost of running Vanguard's 33 actively managed stock funds is only 39 cents for every $100 invested, vs. an industry average of $1.42, says research firm Morningstar Inc. The difference goes straight to investors. He also intends to keep Vanguard a major force in mutual-fund index investing, a notion Bogle pioneered. Vanguard holds 65% of the market. The low expenses have paid off with its bond funds, where returns are lower. Vanguard grabbed one of every three dollars going into bond funds industrywide in 1997's first half.
Still, if Brennan is sticking closely to Bogle's philosophy, he isn't letting Vanguard stand pat. While the publicity-minded Bogle wooed individual investors, Brennan has concentrated on drumming up institutional business, such as from 401(k) plans. In 1997's first half, Vanguard gained $20 billion in new institutional money, bringing its total to $120 billion. Brennan is also overseeing attempts to broaden Vanguard's reach through financial-planning services. They were rolled out in May, 1996, although Brennan is going slow in promoting them until he's sure they can deliver good service at a reasonable cost.
Outwardly, the soft-spoken Brennan and the booming voiced Bogle are different. Yet the two men have much in common fostering their long relationship. Brennan is often in the office by 6 a.m. and typically works past 7 p.m., putting in six hours most Saturday mornings. Before his surgery, Bogle also worked a heavy schedule. Brennan has followed Bogle's habit of working the customer-service phone lines for an hour or two per week, to stay in touch.
Like Bogle, Brennan is intensely competitive. A marathoner, he becomes jittery if he doesn't find time for his midday 6- to 10-mile run. His contribution to Vanguard's success has been mostly behind the scenes. The detail-oriented Brennan is known to track closely such figures as the customer-service response time, quizzing employees on even the slightest decline. He pushed hard to ratchet up spending on Vanguard's computer systems: A decade ago, Vanguard spent roughly 7% of its budget on technology; now, it's about a third. That's been crucial in smoothly handling Vanguard's rapid growth.
It's against Brennan's nature to take credit for any of this. Asked to list his accomplishments, he insists he can't think of any. He contends that any progress is the result of hard work by other members of the crew. Brennan is extremely focused on company morale, holding regular breakfast meetings with employees in the cafeteria. Surprisingly, he's also quite a card. Twice, he made his entrance to the annual Vanguard Christmas circus for employees atop an elephant. And to celebrate the publication of Bogle's book in 1993, he had a mock book jacket made up bearing such review blurbs as "ZZZZ" and "I couldn't keep my chin up."
NUMBERS MAN. One of four children, Brennan grew up in Boston, where his father, Francis, headed Union Warren Savings Bank. A degree in economics from Dartmouth College was followed by an MBA from Harvard business school, after which Brennan worked in the planning department for home products-maker S.C. Johnson & Son Inc. in Chicago. But his interest lay in the financial markets.
Enter Bogle in 1982, needing an assistant who would be good at operations. He pulled some resumes from Harvard. Too cheap to fly Brennan in, Bogle first had him interviewed by phone. Bogle was impressed by Brennan's facility with figures and hired him. Both men carry reams of numbers in their heads and can instantly pick out what's important from a stream of financial data. The two have remained close ever since. When Bogle was working full-time, they lunched together daily in the cafeteria and were in and out of each other's offices constantly.
One of Brennan's biggest worries as he goes forward without Bogle: that the bull market has given many investors a false sense of security. After working the customer-service phone lines early this year, Brennan says he was unnerved by the "lack of fear" he heard in investors' voices. He immediately had the upcoming Vanguard newsletter rewritten to remind investors about inevitable market declines, of which they got a taste in mid-August.
The possibility of turbulent times ahead makes Brennan's raised public profile even more important. "I think he's going to love it," says Bogle. "Most people who have the drive to succeed like to have that recognized." If so, Brennan may even find he doesn't mind giving up some anonymity.