An Industry's Lack of Innovation
The mutual fund industry is rather odd, as industries go. Most industries in our nation's economy have more than their fair share of innovators, ranging from young startups developing new products and services and challenging the status quo, to older, more established firms pushing the envelope on productivity and efficiency.
Some of these innovators and their accomplishments are very well known. Apple's Steve Jobs, Walmart's Sam Walton, Costco's James Sinegal, and Facebook's Mark Zuckerberg, to name just a few, have achieved varying degrees of fame (and wealth) for their vision. But more often, innovators and their contributions are not much recognized or acknowledged beyond the industries they've impacted.
But regardless of their renown, innovators and visionaries have had an outsized impact on the American economy. Over the past century our nation has become the richest in the history of the world, due in no small part to the fluidly dynamic and ever-evolving nature of our economy, traits which go hand in hand with innovation.
And then there's the mutual fund industry. The first mutual fund was founded in 1924. Innovative? Of course. The mutual fund granted average investors access to broadly diversified, professionally managed portfolios at a fraction of the cost they would pay even if they had sufficient assets to cobble together a portfolio on their own.
Flash forward some 50 years to Vanguard's John Bogle, who created the world's first index mutual fund. No disputing the innovation there. The index fund allowed investors to eschew the chase for outperformance in exchange for rock-bottom fees and the highest share possible of the stock market's return. Bogle hypothesized -- and experience has borne out -- that such a strategy would allow index investors to earn superior returns over the long-term relative to their active investing peers.
But beyond that, I struggle to identify a significant innovation or visionary from the mutual fund industry. True, investors today can choose from a selection of fund styles and investment strategies that would have boggled the mind of a professional investor from an earlier era. And there's no denying that mutual fund managers have reaped a veritable fortune from this burgeoning investment menu, primarily because there's a direct relationship between an investment's complexity and its cost. But if true innovation is defined as beneficial to the end user or society at large, these "innovations" fail the test. Expensive, speculative, and often untested, the evidence indicates that in the vast majority of cases investors are worse off for having dabbled in these mutual fund innovations.
Given that background, you might imagine my surprise when I saw an article last week heralding a gala that would salute 60 of the fund industry's visionaries. My first reaction was to wonder where on earth they would come up with 60. My reaction upon reading the list was that it might better be defined as men -- and they're almost entirely men -- who made a fortune in the fund industry.
Yes, the list includes the likes of Bogle, Morningstar's Joe Mansueto, DFA's David Booth and PIMCO's Bill Gross, all of whom have genuinely had a positive impact on the mutual fund industry and its investors.
But the list is dominated by people whose vision is less clear. Take BlackRock's Larry Fink, for instance. Fink engineered BlackRock's purchase of Barclays Global Investors. Acquiring Barclays and its iShares unit immediately made BlackRock the largest player in the rapidly growing ETF industry. While such an acquisition doubtless required a number of things (money and confidence, for instance) I don't think I'd put vision very high on that list.
Another honoree is longtime Invesco director Bruce Crockett. While there's no denying Crockett's long involvement in the mutual fund industry, there's little evidence, as I noted in a post I wrote last year on Crockett, that his service has been marked by a great deal of vision.
Finally, Reserve Management founder and CEO Bruce Bent is on the list, which says just about all you need to know about how hard it is to find a true visionary in the mutual fund industry.
In one sense, Bent's bona fides are better that almost anyone on the list, thanks to his creation of the world's first money market fund in 1970 -- doubtless a true innovation. But more recently, Bent and his firm presided over the industry's highest profile money fund collapse, when the collapse of Lehman Brothers caused that first money market fund to break the buck. In 2009 the SEC charged Bent and his son with securities fraud, alleging that they lied to investors by engaging in "a systematic campaign to deceive the investing public" about the stability of the fund.
So while it's true that Bent made a contribution to the industry, those contributions are accompanied by a rather large black cloud, not to mention a shattered reputation.
Yet despite lugging that considerable baggage around, Bent is lauded because he "helped to create the foundation of the [mutual fund] industry, [having] led and protected it in the past quarter-century."
I guess when you're searching for visionaries to honor in the mutual fund industry, two outta three ain't bad.
What's ironic is that investors have benefited immensely from the relatively few innovations in the mutual fund industry -- the creation of funds in general so many years ago, followed by money market funds, index funds, and even ETFs in the more recent era. Is there yet another innovation out there waiting to be discovered by a brilliant visionary, one that benefits not just the visionary's firm but their clients as well?
It's hard to believe that there's not, simply because there's so much about the mutual fund industry that is just begging to be improved upon. So for investors' sake, let's hope that the next time a list like this is complied, it includes many more individuals who had a true positive impact on mutual fund investors at large, and far fewer lifers who did little more than create their own personal fortune.
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