NEW YORK -- Vanguard Group founder John Bogle is an icon in the world of mutual funds despite his cherished reputation as perhaps the industry's harshest critic.
Bogle's latest campaign is an effort to restore the industry's emphasis on investing and away from its growing dependence on marketing.
''This industry has lost its way,'' he said in a recent speech in New York. ''A half-century ago it was far more an investment business than a marketing business. Today the reverse is true.''
Bogle backed up his assertion with statistics that show the costs of running a mutual fund have risen steadily during the past 20 years, notwithstanding industry-manufactured statistics that indicate otherwise.
In the 25 years since Vanguard first introduced low-cost, low-maintenance index funds to the investing masses, no one has been more outspoken than Bogle in criticizing the fund industry for raising customer fees even as the amount of money flowing into funds continues to soar.
Bogle is known as the father of index fund investing, a low-risk strategy that has come to dominate the mutual fund landscape. Index funds seek only to mirror the results of the broader market, whereas actively managed funds try to outperform the markets.
Since voluntarily stepping down last year as senior chairman of Vanguard's board of directors following an acrimonious public spat, Bogle has turned his attention to acting as a sort of fulltime ombudsman for the mutual fund industry through the Vanguard-sponsored Bogle Financial Markets Research Center.
According to Bogle's research, average operating costs in 1999 had risen to 1.58 percent of a fund's net assets, up from 0.96 percent in 1980.
As might be expected, those higher operating costs, which Bogle attributes primarily to soaring marketing expenses, are being passed on to fund shareholders.
Bogle's figures contradict statistics recently released by the Investment Company Institute, a Washington, D.C., research group that represents the mutual fund industry.
An ICI study found operating expenses generally decline as a fund gets bigger, and that large funds usually have much lower operating expenses than small funds.
The study found that 74 percent of the funds analyzed by the ICI lowered their expense fees after surpassing $500 million in assets, which is significant because most investors prefer big funds.
Bogle argues, however, that the only expense that's falling is the initial cost of purchasing a fund. Which means that consumers may save at the outset by buying low-cost funds, but they will eventually lose over the long-term because annual expense fees continue to rise.
Bogle assesses blame to a shift in the mindsets both of investors and mutual fund managers, all of whom have turned away from a long-term investment strategy to one that chases short-term gains by throwing money at the latest hot sector.
This ''next big thing'' mentality has led to a proliferation of funds geared toward whatever sector is hot at the moment. And in order to attract investors, the fund companies need to spend more and more to market their products.
''Clearly, too many funds have been formed with the principle purpose of being sold to investors,'' Bogle said.
''Mutual fund directors, whether or not they are aware of what is happening or aware of their fiduciary duties, have presided over this change in the very nature of the mutual fund -- from being a sound long-term investment to a product offering a short-term marketing opportunity,'' Bogle added.
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