What Will it Take to Save the Managed Mutual Fund?
In this month's column, I purposely took what I assumed was an extreme position in asking if this was the twilight era for the managed mutual fund. The responses the column generated from individual investors, heads of organizations representing groups of investors, and from those in the U.S. and other countries—if at all representative—provide what is for me a rather sobering assessment of the future of these funds.
At one end of the spectrum are the feelings largely of investors. As Chris Lee put it, "As a small individual investor, I feel powerless to control or even understand how my mutual funds operate." Anupam Bordia comments, "the mutual fund scandal will shift public trust towards index funds."
There is also a suggestion that the job of the money manager may change. Remarking, "we have probably seen the beginning of the decline of the actively managed mutual fund," Charles Broming expressed the hope that "money management will become another technical job and compensation will reflect its real added value."
Part of the problem may be the perception created in press coverage of mutual fund management misdeeds. And part may be in the general ignorance about how funds are managed and investors charged for the services. Whatever the cause, according to William Donoghue, "The financial McCarthyism of the press coverage of anyone who ... proactively manages money as a vile 'market timer' is a sad commentary on how inflexibly the mutual fund industry is viewed by academics, regulators and distributors."
Richard Eckel suggests that both perceptions and real problems will be addressed when, among other things, interests of managers and investors are aligned. As he says, "Linking management fees/rewards to fund performance would be very attractive to investors: Who can argue with shared ambition?"
The importance of these questions lies in the heavy reliance that so many people deep into saving for retirement will place on others to manage their savings, particularly in a future in which Social Security will account for a smaller share of retirement income. How can their options best be preserved? Is the managed mutual fund worth saving? If so, what needs to be done? And how fast must the industry move to correct investor perceptions that appear to have been formed over a number of years? Or is all of this just an overreaction to phenomena that will recede in perceived importance to investors and money managers alike as other concerns crowd them out in our collective consciousness? What do you think?