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Mutual Funds
Bogle: Fund industry at risk
June 1, 2000: 2:14 p.m. ET

Mutual fund guru says industry must change to avoid becoming a 'dinosaur'
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NEW YORK (CNNfn) - Mutual funds are not living up to expectations and the industry will be a "dinosaur" unless it starts to look at funds as long-term investments, said John Bogle, president of Bogle Financial Markets Research Center.

Bogle, the founder and former chairman of the Vanguard group, has spent nearly 50 years in the mutual fund business. In a recent visit to CNNfn's In the Money , he debunked many of what he calls misconceptions that surround the investment strategy of mutual funds.

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graphic John Bogle talks with CNNfn about the investment strategy of mutual funds.
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Mutual funds "don't last as long as you would expect; for example in the 1990s over 50 percent of all the mutual funds that have been in business during the decade are no longer here," said Bogle. "If you invest in a firm you want to hold it long-term, but if the fund doesn't exist your option is nil."

Another myth, said Bogle, is that mutual fund managers are long-term investors. On the contrary, they are more short-term speculators, he said. They turn over their portfolios almost 90 percent a year now, in contrast to a 15 percent to 20 percent turnover rate in the 1950s. Then, they would hold a stock for seven years, now it is just 406 days, Bogle said.

Bogle said shareholders are also emulating managers and are looking at their mutual fund holdings as short-term prospects. Shareholders are turning over their mutual fund interests on average every two years as opposed to 14 years in the 1950s.

Bogle also debunked the theory that mutual fund expense rates are declining. Instead, he said, they are soaring, with the average fund expense rate more than doubling to about 1.5 percent, even though the industry has grown considerably over the years.

Market return for mutual funds has been about 17 percent or 18 percent in the last 15 years, but after taxes and costs are taken out the mutual fund investor has received only about 11 or 12 percent. That means, Bogle said, that over the past 15 years, shareholders have received about one-half of the capital accumulation they would have received in the market. Back to top

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