As I contemplate starting a new investment company, I've had to assess what form it will take. Specifically, I've been trying to decide whether the good ole mutual fund is still a valid investment vehicle, or is it going the way of the 8-track (fortunately, I was lucky enough to avoid that stage of the audio evolution).
The concept of the mutual fund is quite simple. A group of investors, who don't have the capital, knowledge or interest to invest on their own, come together and pool their assets in a common fund(s). By doing that, they can diversify their holdings appropriately, gain access to professional portfolio managers and share in the costs. Mutual funds are accessible to everyone, are tightly regulated (perhaps too tightly) and can be bought and sold daily. If they're set up correctly, mutual funds are a very efficient way to invest in long-term assets (stocks and bonds).
Unfortunately, the marketing imperative has taken over the mutual fund world and in most cases rendered the simple mutual fund a less effective tool. I'm referring to the funds that have (1) built up their fee structure to pay for sales and marketing costs, and (2) haven't been diligent in watching their expenses. David Swensen, in his book 'Unconventional Success - A Fundamental Approach to Personal Investment', goes so far as to say that individual investors shouldn't use actively-managed mutual funds because of the costs and the fact that funds are most often used incorrectly (i.e. investors trade too often in pursuit of past performance).
Can a mutual fund still be an effective and efficient way of investing in long-term assets? Absolutely. It requires, however, that the fat that has crept into the concept be removed and the sponsors (mutual fund companies) act in the best interests of their clients. There are a number of fund families that meet those criteria including my old firm, Phillips, Hager & North, as well as Mawer, Leith Wheeler, McLean Budden, Beutel Goodman, Sceptre and a few others.
Are there better alternatives? Certainly mutual funds face lots of competition today and many of the alternatives are being held out as the way of the future. If I'm assessing how best to structure my business, I've got to give consideration to principal-protected notes, closed-end funds, WRAP's and other 'structured products', which are the big sellers currently. Unfortunately, that's too big a topic for this note, so I'll tackle it next time.
Suffice to say, I haven't given up on the 'good ole mutual fund', nor should other investors.
Final note: David Swenson is in charge of one of the world's most successful endowment funds at Yale University. If I had to recommend one book on investing, his would be it. His logic and way of explaining things is impeccable. It's very dense and at times reads like a text book, but he keeps it going with lots of stories and anecdotes.