In the mutual-fund industry, relying solely on market forces has proved to be a weak remedy for bad behavior. As asset-gathering replaced prudent management as the industry's prime focus, fund expenses rose and nearly 500 new, largely speculative, "new economy" funds were organized and offered at the recent bubble's peak. The fund failure rate soared, with some 1,900 equity funds disappearing in the last decade alone, lost in the dustbin of history, often merged with other, better performing funds, under the same management.
...Few have taken the trouble to examine the heavy penalties that managers have extracted from the returns earned by fund investors. During the past decade, for example, while the stock market has returned an average of 11.1% per year, the average equity fund has delivered just 8.6% -- a 2.5 percentage-point shortfall roughly equivalent to the drain of the heavy sales charges, management fees and operating expenses, and portfolio turnover costs it incurred. (The notorious tax inefficiency of funds would extract several additional percentage points.)
Read the whole thing (subscription required). Bogle helped found the Vanguard group of mutual funds, of which I have been a customer for 30 years. I strongly agree with Bogle's approach to running a mutual fund, while reserving the right to disagree with the view that it should be a public policy objective to try to force other mutual funds to copy Vanguard's philosophy and structure.
It seems to me that if we allow investor foolishness and industry greed to justify regulation, then I don't know where regulation stops. If we do not trust individual investors to act wisely with their money, why not simply force them to hold index funds and be done with it?
By the way, I came across Bogle's op-ed while searching for an article on weblogs that somebody told me praises EconLog. The pat on the back is here.
offers a thoughtful and eclectic diary of economics, tackling both newsy developments (the real-estate market, taxes) and theory. It also includes a list of other good economics blogs -- there are more than you might think.
For Discussion. Does the fact that so many mutual funds went out of business suggest that the market is working or that it is failing?