(Bloomberg) — John McQuown, who started a $12 trillion financial revolution by creating the first index fund, has died. He was 90.
He died on Tuesday. according to Dimensional Fund Advisors, a pioneering quantitative investment firm where he was a founding director. No further details were available. David Booth, founder of the Austin-based firm, called McQuown a “true giant in finance.”
McQuown, known as Mac, was honored on Wall Street for leading a team of academics to create the first equity portfolio to track 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 entered history as a pioneer of index funds for the masses.
If not for a 1971 US Supreme Court decision, McQuown might have been that household name.
At the time, Wells Fargo had decided to offer what became known as its Stagecoach Fund to customers through its branches. The decision of 1971, in Investment Co. Institute v. Campexpressed 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 was never ashamed of Bogle's success, and the pair even shared it an innovation award in 2017. Plus, McQuown left an indelible legacy: The Wells Fargo division he led became Barclays Global Investors, which in 2000 launched the iShares brand of ETFs and was acquired by BlackRock Inc. in 2009. – making it a cornerstone of the world's largest asset manager.
an 'anarchist'
Long 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 the status quo. His Wells Fargo team, he said, had aimed to show that money managers left to their own devices are typically undiversified and too expensive.
“In the 50 years since then, we've shown it to be 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.
As a junior analyst in Smith Barney's corporate finance unit in Manhattan, McQuown spent his weekends renting an IBM 7090, a room-sized computer 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 spinning machine while it ran his programs.
He failed in that quest, but by 1970 was heading the management science research division at Wells Fargo in San Francisco. There, with a willing client in the luggage firm Samsonite and visionary bosses, including the bank's president, Ransom Cook, he began to show a better way to manage money.
University of Chicago
At the time, the advent of computers was driving great strides in financial theory.
A small group of researchers, based at the University of Chicago, was developing an argument that money managers were inefficient and investors were losing. 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 spent millions of dollars trying to turn their ideas into practice. With about $6 million from the Samsonite pension pot, the first index fund was created.
Those involved said it was McQuown who knitted them together, pushing them to turn their research into something that could be used in the real world.
“They needed someone to stand up and say, 'OK, enough theory. We have to supply this. This is important. We can make life better,'' said Booth, a member of the group whose name now graces the Chicago Business School.
The first fund tracked all stocks on the New York Stock Exchange, which at the time numbered about 1,500, with equal weights. The complexity and cost of constantly reweighting the fund's constituents was a major obstacle, 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.
Throughout the rest of his career, McQuown continued to challenge orthodoxy with his financial-engineering impulses.
Quantitative 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. her. The analytical tool, which the trio sold to Moody's Corp. in 2002 for $220 million, is a fixture on trading floors around the world.
In 2004, at the age of 70, he co-founded the credit-focused quant hedge fund DCI. This grew to manage up to $7.5 billion before being acquired by Blackstone in 2020.
With his wife, Leslie, McQuown had a son, Morgan.
At 86, he was drafting policy research papers and managing 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 to learn about wine in France, and to his surprise, the answer was yes. This was the beginning of a personal journey that would eventually lead him to Stone Edge Farm, his 16-hectare (6.5-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 organizing principle of the universe,” McQuown said in 2021. “That was true in my youth and it still is today.”