Capital Ideas — Chapter 12: The Constellation

1. 1. Wells Fargo's trust assets grew from $2 billion in 1970 to $80 billion in 1990 by applying academic portfolio theory.
2. 2. McQuown demonstrated that diversification is paramount, arguing that even a 13-stock portfolio is inadequate regardless of stock-picking skill.
3. 3. Wells Fargo launched the first index fund in July 1971 with a $6 million contribution from the Samsonite pension fund.
4. 4. James Vertin, initially opposed to the new theories, converted after recognizing that traditional active management was failing and that clients were becoming aware of poor performance.
5. 5. William Fouse developed tactical asset allocation, a scientific method to shift assets between stocks, bonds, and cash based on expected returns.
6. 6. By 1990, $270 billion of financial assets were in index funds, with one-third at Wells Fargo, and 30% of institutional equity assets were indexed.
7. 7. The Stagecoach Fund, designed by Black and Scholes to use leverage on low-beta stocks, was abandoned after the 1974 bear market and a Supreme Court ruling against bank mutual fund distribution.
8. 8. McQuown, Vertin, and Fouse all left Wells Fargo by the early 1980s, but the momentum they created sustained the bank's leadership in quantitative investing.