MIAMI-- Jack Brennan, chairman and chief executive of the Vanguard Group, blasted rival investment products such as hedge funds and separately managed accounts on Monday and defended the mutual fund industry against mounting criticism.

Speaking at the National Investment Company Services Association's annual conference here, Brennan called mutual funds the "single-best financial product ever invented," one that doesn't even have a close second.

"A high-cost mutual fund is better than a hedge fund or separately managed account," he said. "A fairly priced mutual fund is compelling." He blasted SMAs, saying that the merits are just not there and that total expenses often exceed 300 basis points, significantly higher than the average mutual fund.

His comments came as a response to the critics who have vilified the $8 trillion mutual fund industry for the recent wave of scandals that have rocked some of the nation's biggest fund complexes. As a result, alternative investments have increased in popularity and are starting to chip away slowly at mutual funds' market share. He also pointed out that those who predicted that companies that only sold mutual funds, like Vanguard, would "go the way of the dinosaur" were dead wrong.

Still, he acknowledged that mutual funds are now operating in a tough, more challenging environment. "We will have to work with a far lighter wind at our back," he said, citing the market challenges of full stock valuations and low interest rates. He also noted that unit revenue levels, currently at their highest, will begin to decline while regulation will continue to drive overhead costs up.

As a roadmap for an industry at the crossroads, Brennan outlined a number of critical success factors for mutual funds. First and foremost, he stressed maintaining client trust.

He also urged his constituents to define success by how their clients fared, rather than measuring cash flows or total assets under management. He also said that firms must stand for something in the marketplace. With different cost structures, investment strategies and distribution methods, there is plenty of room for success, he noted.

He also stressed brand certainty, saying that investors don't want to be surprised. In this new environment, client loyalty will drive a fund company's economics more so than before. He recommended that fund shops figure out how to add value without having it show up in the expense ratio. Another less glamorous factor, albeit a necessary one, is improving phone service levels and meeting 1099 filing deadlines.

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