According to a NYT review, a new book by Louis Lowenstein criticizes the mutual fund industry for failing to produce good returns, and specifically for setting its measurement standard as the S&P 500 average. Okay, if this review is accurate, then it is telling readers everything they need to know about this book. Mutual funds control close to $10 trillion in assets. The market value of corporate equities in the United States is less than $20 trillion. In other words, mutual funds control close to half of all outstanding shares of stock. If mutual funds control half of all stock, how can they, on average, beat the market? This would be possible if the folks who controlled the other half agreed to be very stupid, but otherwise I doubt that they would consent to accept below average returns. The basic point is very simple, if mutual funds control half the market, then their return will on average be equal to the market return. An investor may get very lucky and find a fund managed by a Warren Buffet type, but most investors cannot possibly be so lucky. If you can assume that your fund will get the same return on its holdings as the market as a whole, then the best way to maximize returns is to find a fund with low administrative expenses. If the book doesn't make this point clearly, then wise investors will save their money by not buying it.
--Dean Baker
