David Swenson might not be as well known among the investing public as, say, Legg Mason iron man Bill Miller or former Fidelity Investments star Peter Lynch, but as chief investment officer for Yale University he's built quite a name for himself within the hulking institutional investing circle.
So when Swenson, whose oversight of Yale's $15 billion endowment fund has beat a host of benchmarks by returning an average of 16% annually over the last 20 years, says mutual funds aren't a great investment, it's cause for all sorts of chatter among executives within the money management industry.
Specifically, Swenson contends that the everyday investor should steer entirely clear of mutual funds and stick with index funds run by not-for-profit companies.
"The mutual fund industry has completely failed to provide reasonable active-management returns to individuals,' Swenson told The Wall Street Journal.
That's because, Swenson said, actively managed mutual funds are run as a for-profit venture.
"Mutual fund managers have a fiduciary responsibility to investors. Obviously, if they are operating in a for-profit mode, they have a profit motive," he remarked. "When you put the profit motive up against fiduciary responsibility, that fiduciary responsibility loses, and profits win.
"The problem in the fund industry," he continued, "is that you've got a sophisticated provider of investment services on the one hand and, one the other, you have an unsophisticated consumer. That imbalance leads to behaviors that line the pockets of mutual fund managers and at the expense of the individual investor."
Swenson bases his claims on research he's compiled for a new book and says the best way for a mutual fund to beat the market is to limit assets under management. Concentration and conviction, meanwhile, are the investment principals that have driven his tenure at Yale. But, he adds, that formula won't work for conventional mutual funds.
"It's not sensible for a mutual fund to do that from a business perspective because the volatility of the results relative to the market will be way too great, and the manager of the mutual fund will likely not be able to amass the same level of assets they would if they pursued a much more diversified strategy," he remarked.
Swenson also told WSJ that performance chasing by individuals also hurts the returns of mutual fund collectively, and he added that 12b-1 fees are at odds with investor returns and the argument that they help the fund industry attract new investors "doesn't have merit."
"It's a very sweet deal for the mutual fund industry, and it's terrible for the investor," he said of the fees.