Yale's Swensen: Mutual Funds Are for 'Fish'

Aug. 15, 2011 10:23 AM ET37 Comments
Russell F. Coleman profile picture
Russell F. Coleman
22 Followers

An excellent op-ed on the undesirability of actively managed mutual funds is in Sunday's NYT. The op-ed, by Yale CIO David Swensen and available here, explains how most mutual funds companies' rich fees, other high costs, and excessive portfolio trading -- and investors' "chasing performance" -- lead inexorably to poor investment results.

The op-ed touches on the Morningstar study blogged about here last August. The study shows that a given fund's investment costs -- principally its expense ratio -- are the best predictor of the fund's investment performance. Simply put, low costs predict favorable future investment performance better than any other fund characteristic.

The op-ed continues a theme for Swensen, who has commented frequently that mutual funds are undesirable. In today's op-ed he refers to for-profit mutual fund companies as parasitic. Let me describe the situation similarly: mutual funds are for fish.

Swensen suggests three fixes. The first is self-help, taking control of one's investments and sticking to low cost index funds such as those from Vanguard. The second and third suggested fixes call for SEC action.

Let me suggest that the first fix is far and away the best remedy. Let's call it "caveat investor," which translates as "let the investor beware": do not give your money, hard-earned or otherwise, to actively managed mutual funds.

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Russell F. Coleman profile picture
22 Followers
Russell F. ("Russ") Coleman, an attorney, is professionally experienced in securities, finance, and business matters.

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