The Mutual Fund Industry 60 Years Later: For Better or Worse?

The mutual fund industry has undergone tremendous change in the past 60 years. Total assets, number of funds, and fund costs have increased exponentially, whereas both the duration of the funds' portfolio holdings and the duration of their shareholders' holdings have tumbled. The industry's ownership of corporate stocks is at an all-time high, yet mutual fund managers have been noticeably absent from the corporate governance debate. This article details 10 fundamental changes that have taken place in the mutual fund industry since 1945 and finds that, in the aggregate, they have benefited mutual fund managers to the direct and commensurate detriment of mutual fund investors. The mutual fund industry has undergone tremendous change since 1945. Among the 10 major changes I identify and discuss are the following:The size and the number of funds available: What was a small industry (68, largely stock-oriented funds) with less than $1 billion in assets has become a giant, with assets now spread over a $7 trillion array of 8,000 stock, bond, and money market funds.Broadening of stock fund investment styles: Stock funds in 1945 were largely large-capitalization blend funds that offered broad diversification, and for the most part, they were suitable to be held as the sole component of an investor’s equity investment portfolio. Today, “style box” investing has become the name of the game. Investors are able to slice and dice their equity fund investments into any number of styles and sectors.Fund holding periods have declined dramatically: From the 1940s until the mid-1960s, equity mutual funds were long-term investors that turned their portfolios over at an annual rate of less than 20 percent. They have gradually become short-term speculators that now turn their portfolios over at an annual rate of more than 100 percent.The mutual fund industry’s ownership of Corporate America: In 1945, the mutual fund industry controlled barely more than 1 percent of all U.S. equities. Today, that figure is nearly 25 percent. The mutual fund industry has become the proverbial 800-pound gorilla. It could sit anywhere it wants at the corporate board table, but it rarely even attends the meetings.The costs of fund ownership have risen dramatically: Total mutual fund assets have increased 3,600-fold since 1945, but mutual fund fees and operating expenses have increased 6,600-fold in that same period—a stunning rise, particularly in an industry that is characterized by tremendous economies of scale.These changes in the industry raise a simple question: Have the changes benefited mutual fund investors? Extensive data confirm that they have not. The industry needs to go “back to the future” and return to its fiduciary roots.