Fundsters -- particularly those in the actively-managed and advisor-sold parts of the business -- may want to take a look at yesterday's edition of the New York Times. Yale chief investment officer David Swensen penned what amounts to a call-to-arms against the mutual fund industry, both asset managers and retail advisors.

David Swensen Yale CIO

"For decades, the mutual fund industry, which manages more than $13 trillion for 90 million Americans, has employed market volatility to produce profits for itself far more reliably than it has produced returns for its investors," Swensen wrote.

Swensen heavily emphasized the performance-driven nature of fund flows ($304 billion flowed into four-star and five-star funds last year, compared to $152 billion flowing out of one-to-three-star funds).

He claimed advisors nudge their clients to buy and sell more frequently to drive up fees -- though he didn't mention the flat or asset-based fees many advisors now use. And he further claimed that mutual fund firms encourage fund shareholders to buy high and sell low -- though he made no mention of the fact that many investors (institutional ones like retirement plan sponsors, as well as individuals) may be pushing the fund firms and advisors into selling them top-rated funds, because many investors won't touch a fund that isn't top-rated.

As remedies, Swensen wants investors to "take control of their financial destinies, educates themselves, avoid sales pitches and invest in a well-diversified portfolio of low-cost index funds." He likes Vanguard, which he describes as not-for-profit -- Vanguard does emphasize low-costs, yet the firm is mutually-owned by its mutual fund shareholders.

Swensen also wants the Securities and Exchange Commission (SEC) to push investors away from active funds and performance-chasing, perhaps by requiring every active mutual fund to have an index sibling, and he wants retail advisors held to a fiduciary standard of care instead of a suitability standard.

An adjunct professor of finance who joined the University 26 years ago, Swensen PMs Yale's $16 billion endowment fund. Together with Dean Takahashi, Swensen developed the "Yale Model" (also called the "Endowment Model") of investing, a variation on Modern Portfolio theory that emphasizes equities, private equity and broad diversification while shunning liquidity. His books include Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment (which outlines the Yale Model) and Unconventional Success: A Fundamental Approach to Personal Investment. 

Edited by: Neil Anderson, Managing Editor


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