The mutual fund industry faces slowing returns on stocks and other new challenges, according to John C. Bogle, founder of the Vanguard Group, who spoke at the National Press Club yesterday.

'We have departed a two-decade-long golden era for equity investors in which, we never had it so good, and are entering an era in which the party’s over,' Bogle said.

To meet these new challenges,

the industry must rein in costs, Bogle said. Costs eat up about 31 percent of investment returns on a market return of 10 percent, Bogle said. With taxes eating up another 1.5 percent, an investor can expect to see only slightly more than half of the market return. Bogle also said the mutual funds industry must refocus on the long term.

'A return to the industry’s once traditional long-term orientation is long overdue, and would reduce not only fund transaction costs, but also the heavy tax burden that such turnover foists on often unsuspecting shareholders,' he said.

Bogle also said that management must come before marketing. Fund companies increased their advertising budgets during the technology stock boom, touting past performance of their hottest funds, he said.

'What’s wrong with that?' he asked. 'First, winners rarely, if ever, repeat.' Technology stocks declined by 62 percent after they peaked, he said.

'Second, advertising is expensive,' he said. 'Directly or indirectly, it is the mutual fund shareholder who foots the bill. Sweet marketing, it turns out, is usually sour investing.'

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.