Despite the success of the mutual fund industry in the past 30 years, funds could become an "endangered species," according to John C. Bogle, the founder and former chairman of Vanguard Group.
Speaking at a conference on Monday sponsored by the Boston technology research and consulting firm Forrester Research, Mr. Bogle said that mutual funds' status as the main investment vehicle for most Americans could be threatened by ever-rising expenses and overzealous marketing of portfolios that do not serve investors' long-term interests.
High fees could undermine investors' confidence in the fund industry since they erode long-term returns and enrich the financial industry, he said.
New funds based on hot trends - such as Internet funds - are also problematical because they encourage investors to chase short-term performance and inevitably hurt long-term returns, he said.
The main entity that profits from investors' chasing of short-term results is the financial industry itself, which pockets substantial commission fees every time an investor leaves a fund, Mr. Bogle said. "It's high time to drive the money changers from the temple," he said.
In a February report called "The End of Mutual Fund Dominance," Forrester Research predicted that some products with many of the same features as mutual funds - such as personal portfolios - would push the funds out of the market because of their lower costs and increased flexibility.
Mr. Bogle, who stepped down as chairman of the Valley Forge, Pa.-based Vanguard on Dec. 31, 1999, has long championed index investing. Most actively managed funds are too expensive, he said, and they rarely outperform the overall market over the long term.
Vanguard is now the world's second-largest fund company, with $550 billion of assets under management.
Despite Mr. Bogle's criticism of the industry, he said mutual funds will remain popular among average investors if the companies use index investing.
Though mutual funds have not declined in popularity in recent years, they have slipped in terms of net sales volume. New money has continued to come into mutual funds, but net sales last year dropped 4.2% from 1998, to $297 billion, according to the Investment Company Institute in Washington.
Mr. Bogle also said that products such as individually managed accounts, exchange-traded funds, and low-cost online portfolios are becoming increasingly popular, but he said they pose little threat to the mutual fund industry. These products give investors plenty of room to trade actively - which is the antithesis of what mutual funds should preach to investors, he said.
In an interview after the speech, he said these products could hurt investors because their structure discourages long-term investing.
Both separate accounts and mutual fund wrap accounts are compelling products for some investors, but they are too expensive for most, and they can discourage long-term investing by encouraging investors to get out of stocks they think have hit their peak, Mr. Bogle said.
Products like folios - which operate much as online individually managed accounts do - have compelling advantages, but they are more likely to draw money away from the brokerage community than from the fund industry, he said.
Exchange-traded funds - baskets of stocks that trade on exchanges like regular stocks - are primarily used by short-term investors, Mr. Bogle said. Despite the increasing levels of investor curiosity about such funds, he said he would not recommend them for the typical mutual fund investor because they encourage investors to trade too frequently.
Stephen Fischer, chief executive officer of the Minneapolis third-party marketing firm Fintegra Financial Solutions, agreed with Mr. Bogle's assessment of the threats to mutual funds.
Actively managed portfolios are unlikely to replace mutual funds, he said, because they usually require investors to spend more time analyzing the products than they want to.
A recent study said that the average American spends less than an hour a month on financial matters, Mr. Fischer said. This suggests that few investors would be willing to take the time needed to familiarize themselves with these portfolio products, he said.
Lee Ann McCool, vice president of marketing at PrimeVest Financial Services Inc., a third-party marketer in St. Cloud, Minn., said she was more skeptical about the ability of mutual funds to retain their dominant market share in the long term.
Demand for fee-based brokerage plans is growing at financial service firms, though that growth is a bit slower in banks, Ms. McCool said. This means that other kinds of products, such as separate accounts, are inevitably going to be used more often by investors, she said.
However, in the short term, though it remains to be seen how much these products will encroach on mutual funds, strong demand persists for mutual funds, she said.
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