The time has come for mutual funds and other institutional investors to vote their proxies in favor of individual investors and truly exert their fiduciary duty, John Bogle, founder and former chief executive officer of Vanguard, writes in a Wall Street Journal editorial titled, “Restoring Faith in Financial Markets.”
Bogle notes that institutional investors control nearly 70% of the outstanding stocks in the U.S., with mutual funds owning 26%, followed by private pension plans (11%) and government pensions (9%).
Rather than focus on improving a company’s intrinsic value, Bogle writes, institutional money managers turn over stocks an average of 250% a year, creating, in his words, “the momentary illusion of the price of a stock.”
As an aside to this, Bogle notes, the mutual fund industry earns nearly $100 billion in fees a year, up from $47 billion a decade ago, further eating into investors’ returns. In addition, the complex financial instruments that investment banks created in the early part of this century and the trendy funds that mutual fund firms continue to churn out “lead institutional money managers to ignore the realities that drove the balance sheets and income statements of the companies held in their portfolios.”
Thus, Bogle is calling upon Congress to establish a federal principal of fiduciary duty that requires institutional mangers to act solely in the interests of their shareholders, actively participate in corporate governance and eliminate conflicts of interest.