In an op-ed piece in The New York Times (available here; if you are unable to read the article run a Google search for the term ‘The Mutual Fund Merry-Go-Round’ and click through), David Swensen, author of Unconventional Success: A Fundamental Approach to Personal Investment, rips into the mutual fund industry for putting its profits ahead of producing returns for investors. He charges the industry with abetting investors in chasing performance through marketing campaigns that prominently play up the mutual funds in the line-up that have managed to garner coveted four- and five-star ratings from Morningstar.
Unfortunately for investors, many of the newly-minted four- and five- star funds are successful in attracting a flood of new money but go on to post poor future returns. The fund company isn’t suffering though. Some of the old dogs are now star mutual funds that can now be advertised with their recent performance prominently displayed and the process starts all over again.
Mr. Swensen offers a couple of suggestions for getting off the mutual fund merry-go-round. (1) Investors should learn to avoid the siren song of mutual fund advertisements and invest in a well-diversified portfolio of index funds such as those from Vanguard and (2) Aggressive policing of the mutual fund industry by regulators. Investors may be better off voting with their wallets now instead of waiting for regulators to do the job for them.
