Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition

Chapter 15. On Principles: Important Principles Must Be Inflexible

One hundred and thirty-four years ago, in what proved to be his final public address, Abraham Lincoln said: "Important principles must be inflexible." He was right. In my judgment, the single most important principle on which the mutual fund industry was founded—and under which it has prospered—not only has become far too flexible, but is apparently being abandoned. This chapter will describe how this process has disengaged us from our roots, propose some solutions, and, along the way, suggest the role that mutual fund shareholders might play in a renaissance that will make this a better industry.

What are the mutual fund industry's founding principles? Management, diversification, and service (including daily valuation of fund shares, liquidity, full disclosure, and convenience). Of these principles, management is the most important. Fund management, in my view, should be defined by a spirit of trusteeship, professional competence and discipline, and focus on the long term. That vital principle and these three critical components are in the process of losing their role as the driving force—in the long run, the life force—of the mutual fund business.

That is a strong statement, but I consider it a fair description of what is going on in the industry at present:

• Trusteeship implies making the interests of fund shareholders our highest priority and charging a reasonable price for our services. It is being supplanted by ...