We review an article by David F. Swensen, the chief investment officer at Yale University and was published in the Op-Ed section of the New York Times on August 13 2011.
In summary he outlines several salient points including:
That Managed Funds (called Mutual Funds in the U.S.) have employed market volatility to produce profits for themselves far more reliably than returns for its investors;
The companies that manage for-profit mutual funds face a fundamental conflict between producing profits for their owners and generating superior returns for their investors;
The rating systems used by the industry merely identifies funds that performed well in the past; it provides no help in finding future winners; and
Investors should avoid highly promoted active funds and instead invest in a well-diversified portfolio of low-cost index funds
The article certainly caused a stir in financial circles in the U.S. and does highlight the folly of trying to chase returns by looking at past performance and retail funds carrying a high rating from rating agencies, designed to service the retail financial planning industry.
We agree with the majority of the article, however we disagree that wholesale "for profit funds" have a conflict of interest. These funds are tailored specifically to their clientele, and are generally only rewarded for performance by a management fee that provides a higher profit (in dollar terms) when their assets rise through good performance and increased investment. We do however agree that retail "for profit" funds have a general tendency towards low water benchmark targets for performance and management fee income generation.
We agree with the authors contention that establishing a well-diversified portfolio of index based investments that are tailored the risk and return parameters of an investor is the most efficient way of investing; however we would add that these portfolios should consist of mainly proprietary indexes, designed in conjunction with "best of breed" investment banks and specialist advisors. The full article can be viewed on the following web address:
