Investors who haven’t yet discovered or considered exchange traded funds (ETFs) might be inclined to after checking out a new book that performs a scathing examination of the mutual fund industry.
The Investor’s Dilemma: How Mutual Funds Are Betraying Your trust and What to Do About It, by Louis Lowenstein, is reviewed by Harry Hurt III for the New York Times.
The book points out a conflict of interest in the mutual fund industry, because management companies are independently owned and separate from the funds themselves. Managers profit by maximizing the funds under management, because the fees are based on assets and not performance. For that reason, Lowenstein says, the majority of mutual funds are more interested in taking money from investors instead of making money for them.
From 1980 to 2004, the assets of stock funds increased from $45 billion to $4 trillion. In that same time period, the fees investors paid grew from $288 million to $37 billion. And the fund managers were paid whether the prices of the stocks they picked went up or down.
Performance ranges from dismal to atrocious, says Lowenstein, particularly when one compares the performance against the profit coming in.