John C. Bogle, founder of The Vanguard Group of Valley Forge, Pa., recently warned the mutual fund industry that it will lose its cherished spot in the hearts of long-term investors if it doesn't become more accountable to shareholders.

Bogle was speaking at a recent forum in New York of the Financial Planning Association of Atlanta. Bogle told a ballroom of financial advisers that investors have more to blame than themselves. Bogle said fund managers played a role in the stock market's unrealistic buildup and subsequent implosion because they "uncritically accepted the hyped-up growth projections for technology, medical and telecommunication stocks, and piled them into the funds they manage[d]."

Moreover, Bogle said the industry fanned the fervor in the final years of the mania, creating 116 new technology funds - including 40 Internet funds and 12 Nasdaq QQQ funds - and 378 growth and aggressive growth funds.

If the fund industry is going to be successful in holding off competition from separately managed accounts and other threats to mutual funds, Bogle said the industry must get back to basics and strike a proper balance between stewardship and salesmanship.

First of all, he said, fund fees must come down. Although there has been no wave of reductions, Bogle said it must be obvious that investors are sending the majority of their cash to funds that have the highest "stewardship quotient."

He defines fund stewardship quotient as the following:

* The lowest fees on equity funds

* The greatest index fund orientation

* The strongest bond and money market line up

* The greatest reluctance to pander to public taste in new fund offerings

* The lowest portfolio turnover

* The greatest tax efficiency

* The longest holding periods by

existing shareholders

Bogle said even fund families that already have high stewardship quotients have room for improvement. "That improvement will come, day by day, week by week, year by year, as investors turn to firms" that indicate they care about them.

He warned the industry that fund fees would probably continue to suffer in poorly performing markets for the foreseeable future. Bogle said he anticipates equity returns to range from 4% to 8%, bond returns to yield 5% to 7% and money markets to return 3% to 4%.

Bogle titled his speech, "The End of Mutual Fund Dominance," based on a report that Forrester Research of Boston released last fall. The study projected that mutual fund assets will grow by 26% and separate account assets will grow by 400% by 2004, a year that could signal the fund industry's demise.

Quoting Mark Twain, Bogle said thoughts of such a death have been greatly exaggerated. "If it merely chooses to do so, the mutual fund industry can continue its dominance on the balance sheets of individual investors for as far ahead as the mind can imagine," he said.

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