ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, December 1, 1996 TAG: 9612030041
SECTION: BUSINESS PAGE: 1 EDITION: METRO
COLUMN: Investment
SOURCE: MAG POFF
Small investors are hurt because most mutual fund managers engage in ``casino capitalism,'' according to the chairman of the nation's second-largest family of funds.
An excessive portion of the amounts wagered goes to the house, said John C. Bogle, founder of the Vanguard Group of investment companies and a longtime critic of his industry. He made the comment last month to a group of personal finance writers in Chicago sponsored by the Society of American Business Editors and Writers.
The industry, he told us, is rapidly subverting the principles of management, diversification and service on which it was built.
The old ideal of trusteeship, which emphasized shareholder interest above all and at a reasonable fee, ``is being supplanted by a focus on asset-gathering - on distribution - as we worship at the shrine of the Great God Market Share, the exorbitant cost of which is borne by our own fund shareholders.''
Bogle said the traditional focus on professional competence has changed from long-term investment to speculation by ``far too many gunslinger portfolio managers.''
And where funds once sought long-term investors, he said, the focus today is on enticing investors into rapid switching ``either for the purpose of market timing or for the purpose of jumping on the bandwagon of the latest hot fund.''
Since 1970, Bogle said, the time that an average investor holds a fund has shrunk from 121/2 years to 21/2 years.
In short, mutual funds have become a business in which the name of the game is to attract large amounts of money at rising fees and charges.
Why should selling shares to more and more investors be a problem?
First, Bogle answered, advertising and sales are extremely costly, and the costs are borne by mutual fund shareholders in the form of ever-rising expense ratios.
The expenses charged to investors in equity funds have risen by about 50 percent in 15 years - from 1.02 percent of assets in 1981 to 1.55 percent, even as assets exploded from $40billion to $1.5trillion.
That means, he said, that shareholder costs have risen from $320 million to $16 billion in the same period - a 50-fold increase in the face of a 37-fold increase in assets.
Secondly, he said, no significant benefits flow to shareholders as a result of a fund's larger size. ``Thus, shareholders are paying the piper, as it were, but are not getting a better tune.'' In the real world, he said, higher costs widen the gap between the return on a stock market index and the earnings from a mutual fund.
The result of these two trends, he contended, is that high fees pay huge profits to fund managers and directors who underperform the financial markets in which they participate.
Bogle said he no longer believes that directors will mend their ways despite being required by law to place the interests of their shareholders first.
That leaves competition, which has failed so far in the mutual fund industry. He attributed that to a roaring bull market where a 15 percent annual gain has translated into a 13 percent return for mutual fund shareholders.
We are unlikely in our lifetimes to see the likes of such a market again, he said. ``But in a less generous stock market, with better-informed investors, competition should, finally, carry the day.
``Make no mistake about it,'' Bogle said, ``costs are essentially the sole determinant of money market fund relative yields - and investors care about those yields.''
He exhorted the financial press to educate the public about the true cost of funds, but he also wants some changes made in the way funds present information.
Bogle would, for instance, like a fund's prospectus to show the percentage of earnings taken up by fees rather than stating the dollar cost of a $1,000 investment. That's because the cost looks slight on $1,000 even though the percentage may be high. And it should compare the fund's performance against others of similar risk.
He also recommends that funds report performance on the basis of total net assets rather than on the significantly higher per-share basis. Bogle said the first figure represents what shareholders actually earn. In one case, he said, the actual performance was minus 4 percent, while the fund bragged about a 20 percent gain.
Mutual funds equate to witchcraft, he said, because ``hot'' funds' gross returns always return to the market level. Net returns, or what investors actually earn, always revert back to the market level less their costs.
LENGTH: Medium: 87 linesby CNB