Let's dissect Swenson's mess one point at a time:

"For decades, the mutual fund industry, which manages more than $13 trillion for 90 million Americans, has employed market volatility to produce profits for itself far more reliably than it has produced returns for its investors."

Easy to write, but he provides no evidence of this. Of course, mutual funds that trade frequently or use options (normally the purview of hedge funds, not mutual funds) should profit from market volatility, but that profit accrues to the shareholders. That making money for shareholders (something the shareholders want) also makes money for the fund's investment advisor (something the investment advisor wants) is the fundamental win-win principal that shows capitalism at its best.

Maybe Swenson skip class the day they taught that.

"…the [mutual fund] industry has a history of delivering inferior results to investors."

 

Granted Swensen was at the top of his game in the 1990s, when he used Yale's largess to make deals in hard-to-price illiquid markets. His returns matched those of the best stock pickers. Later on in the piece Swensen advises "invest in a well-diversified portfolio of low-cost index funds." He even went has far as naming a specific fund company without disclosing whether he had ever had any affiliation with that company. In encouraging investors to use index funds, Swensen conveniently forgets data which shows the returns of the average mutual fund far exceeded those of the market during the "lost decade."

Ironically, while advocating the fiduciary standard for advisors, Swenson suggests "individual investors should take control of their financial destinies, educate themselves, avoid sales pitches…" in essence, shun advisors. While his reasoning is noble – he wants to discourage broker "churning," the logic is, well, less than logical. Swensen could have more easily made his case – and stay on point – by citing the relevant academic research showing the returns of broker sold funds trail those of direct-buy funds by 1%.

Swensen then aims his fire at the SEC, asking them to "employ its considerable regulatory and enforcement powers to encourage individual investors to embrace low-cost index funds," require "every mutual fund offering be accompanied by an index-fund alternative" and "hold the mutual fund industry to a "fiduciary standard."

We've already addressed the first point from an analytical standpoint, however all three of these recommendations shows Swensen's extreme lack of understanding of both the Investment Advisers Act and the Investment Company Act, as well as the role of the SEC.

The SEC does not exist to promote one investment philosophy over another – and that's exactly what Swensen wants it to do by promoting one business model (index funds) with another business model (active funds). Despite headlines that continue to trumpet early research showing the return advantage of index funds, current researchers believe neither has a return advantage.

Additionally, for more than a decade, the SEC has required all mutual funds – including index funds – to show relative performance returns – including after-tax returns – versus a comparable benchmark. Indeed, this SEC required comparison can actually mislead investors because the benchmarks do not include trading costs, custodian fees and regulatory expenses, thus putting mutual funds at a disadvantage.

Finally, and this must most embarrass anyone who knows Swensen, the management of mutual funds already fall under the fiduciary standard. Why? Every investment advisor who manages a mutual fund must register with the SEC and every SEC-registered investment advisor must comply with the fiduciary standard.

Those in the industry who read Swensen's New York Times article are left to ponder who comes out worse in publishing an article that only succeeds in highlighting the ignorance of the author. Is it the author, the author's publisher or author's employer?