Chapter 6. Too Much Salesmanship, Not Enough Stewardship

It is especially painful for me to acknowledge that the mutual fund industry is in many respects the exemplar of the deterioration in business values and investment values that I have just described. So allow me to turn here to the very industry that I entered in 1951 and in which I have served ever since, and discuss the vast changes that have swept through it during my more than half-century in the field. First, let's chronicle these changes, which together have tipped the balance away from the stewardship of yore to the salesmanship that clearly characterizes the industry today.

The most obvious change is that the fund industry has enjoyed enormous growth. Once a midget, it is now a giant. In 1951, mutual fund assets totaled $2 billion. Today, assets total more than $12 trillion, an astonishing 17 percent average rate of annual growth over more than a half-century—a rate that has been exceeded by few, if any, other industries. In 1951, equity funds held about 1 percent of all U.S. stocks; by 2008, they held a stunning 35 percent, making the mutual fund industry the nation's most dominant financial institution.

Far less obviously, the fund industry has significantly changed its investment focus. Then, almost 80 percent of stock funds (60 of a mere 75 funds) were broadly diversified among investment-grade stocks. These funds pretty much tracked the movements of the stock market itself and lagged its returns by only the amount ...

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