By Sam Potter
John McQuown, who started a $US12 trillion ($18 trillion) financial revolution with the creation of the first index fund, has died. He was 90.
He died on Tuesday, according to Dimensional Fund Advisors, a pioneering quant-investing firm where he was a founding director. No further details were available. David Booth, founder of the firm, called McQuown a “true giant in the field of finance.”
John “Mac” McQuown left quite a legacy.
McQuown, known as Mac, became revered on Wall Street for having led a team of academics to create the first equity portfolio tracking an index at Wells Fargo & Co. in 1971. On Main Street, by contrast, he was a virtual unknown, unlike Vanguard Group’s John Bogle, who went down in history as the pioneer of index funds for the masses.
If not for a US Supreme Court ruling in 1971, McQuown might have been that household name.
At the time, Wells Fargo was set to offer what became known as its Stagecoach Fund to customers through its branches. The 1971 ruling, in Investment Co. Institute v. Camp, held that the Glass-Steagall Act prevented commercial banks from offering what were then called collective investment funds. Aware of Bogle’s ambition to spread such collective accounts far and wide, Wells Fargo shared much of its research with the Vanguard founder.
In 1976, Vanguard introduced the first retail index mutual fund, today’s Vanguard 500 Index Fund.
McQuown never begrudged Bogle’s success, and the pair even shared an innovation award in 2017. Plus, McQuown left his own indelible legacy: The Wells Fargo division he headed became Barclays Global Investors, which in 2000 launched the iShares brand of ETFs and in 2009 was bought by BlackRock — making it a foundation of the largest asset manager in the world.
An ‘anarchist’
During an interview to mark the 50th anniversary of the first index fund in 2021, McQuown described himself as an “anarchist” who felt a constant need to question the establishment and status quo. His Wells Fargo team, he said, had aimed to show that money managers left to their own devices are typically undiversified and overly expensive.
“In the 50 years since then, we’ve demonstrated that’s right,” McQuown said.
John Andrew McQuown was born on July 17, 1934, and grew up in a farming family in the northern Illinois town of Sandwich. After earning a degree in mechanical engineering from Northwestern University and then an MBA from Harvard in 1961, he embraced an emerging discipline called computer science.
John McQuown was revered on Wall Street for having led a team of academics to create the first equity portfolio tracking an index at Wells Fargo & Co. in 1971.Credit: AP
As a young analyst in Smith Barney’s corporate finance unit in Manhattan, McQuown spent his weekends renting time on an IBM 7090, a room-sized mainframe installed in the basement of the Time-Life Building. He wanted to see if he could predict how stocks would perform, so he built a database and then slept next to the whirring machine as it ran his programs.
He failed in that quest but by 1970 was leading the management sciences research division at Wells Fargo in San Francisco. There, with a willing client in the Samsonite luggage firm and visionary bosses including the bank’s president, Ransom Cook, he set about showing a better way to manage money.
‘I still argue that serendipity is the organising principle of the universe. That holds for my youth, and it holds today.’
John McQuown in 2021.
Nobel prizes
At the time, the advent of computers was powering huge leaps in financial theory.
A small group of researchers, centred on the University of Chicago, was developing an argument that money managers were inefficient and investors were losing out. These giants of financial academia included Harry Markowitz, William Sharpe, Eugene Fama, Fischer Black, Mike Jensen, Jim Lorie and Myron Scholes. As McQuown liked to remind people, “We had a dozen academics working with us. Six of them have Nobel prizes now.”
Wells Fargo lavished millions of dollars on the endeavour to turn their ideas into practice. With about $US6 million from the Samsonite pension pot, the first index fund was created.
Those involved said it was McQuown who knitted them together, pressing them to turn their research into something that could be used in the real world.
“They needed somebody to stand up and say, ‘OK, enough of the theory. We need to get this supplied. This is important. We can make lives better,’” said Booth, a member of the group, whose name now adorns the Chicago Business School.
McQuown took time out early in his career to travel to France to learn about wine. He then opened a vineyard in San Francisco.Credit: Getty Images
The first fund tracked all the shares on the New York Stock Exchange, which back then numbered around 1500, on an equal-weight basis. The complexity and cost of constantly re-weighting the fund’s constituents was a huge drag, and in 1976 the Samsonite product was rolled into another fund that held members of the S&P 500 Index in proportion to their market values.
Through the rest of his career, McQuown continued to challenge orthodoxy with his financial-engineering impulses.
Quant fund
He was a director of Booth’s Dimensional Fund Advisors from its inception in 1981. In the 1990s, McQuown and two partners devised a way to use a company’s stock price to predict how likely it was to default on its debts. The analytical tool, which the trio sold to Moody’s Corp. in 2002 for $US220 million, is a fixture on trading floors worldwide.
In 2004, at the age of 70, he co-founded credit-focused quant hedge fund DCI. That grew to manage as much as $US7.5 billion before it was bought by Blackstone in 2020.
With his wife, Leslie, McQuown had a son, Morgan.
At 86, he was drafting political research papers and directing the sustainable development of his vineyard in Sonoma, California. Wines were his second career: In 1968, he had asked his boss to give him a month off so he could learn about wine in France, and to his surprise, the answer was yes. That was the beginning of a personal journey that would ultimately take him to Stone Edge Farm, his 16-acre estate nestled between two mountain ranges north of San Francisco.
His wines were critically acclaimed, and his vineyard won awards.
“I still argue that serendipity is the organising principle of the universe,” McQuown said in 2021. “That holds for my youth, and it holds today.”
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