“The fault, dear Brutus, is not in our stars, but in ourselves.” So said the protagonist in Shakespeare's play Julius Caesar. Most of this book has described how the mutual fund industry works today. But this industry can be greatly improved and can provide far better opportunities for investors. Positive change will take place, however, only if we lay the responsibility for the industry's shortcomings not in our stars but in ourselves as shareholders. If enough investors demand a better mutual fund industry, we will have a better mutual fund industry. All you need to do is stand up for your rights as investors.

It may seem difficult for a shareholder with a relatively small investment to advance change. After all, the average investor owns perhaps a $10,000 holding in a $500 million mutual fund, or a voting interest of something like 2/1000ths of 1%. But if you believe, as I do, that even one person can make a difference, any change that enough mutual fund shareholders demand will surely come to pass. I am not suggesting that mutual fund shareholders must act in concert with each other. That proposition would take organization, tedium, and patience. Rather, I am suggesting that if all shareholders merely act independently in concert with their own financial needs and best interests, the mutual fund industry will soon improve.

In considering exactly what is in your best interests as a mutual fund investor, I suggest that you abide by these four elementary rules: (1) be canny, (2) be thrifty, (3) be active, and (4) be skeptical. In the following pages I will review these rules as if they were mutually exclusive, but intelligent investors will want to incorporate all four into their investment programs.

THE CANNY INVESTOR

It seems almost naive to suggest that if investors are canny—wise enough to rely on their own common sense and good judgment—the mutual fund industry will be an even better investment medium. Nonetheless, I believe it to be true. As an industry, it is exceptionally responsive to investors' needs and demands. Through modern, sophisticated direct marketing techniques and energetic, highly motivated sales forces, the industry responds to consumer demands as quickly as any financial services business I have ever observed. The problem is that investors have largely demanded the wrong things and have for the most part ignored the right things. So any industry improvement depends first on a change in investors' attitudes—acting wisely and carefully in the selection and ownership of mutual fund shares.

While it seems trivial to suggest that the canny investor begin by reading fund prospectuses, that is where it really does begin. Which prospectuses should you read? Surely not those of all of the funds in the industry, nor even the 1,000 or so funds that might be covered in the leading statistical services, nor even the hundreds that might be involved if you decided on, say, a common stock fund. Perhaps a selection of prospectuses from among a dozen stock funds, half as many bond funds, and half that many money market funds, would be appropriate. That gives you just over 20 prospectuses to wade through and review the important points. It is a worthwhile investment of your time.

Where do you begin the process of selecting sample prospectuses? The most logical starting point is to review the prospectuses of some of the funds that comprise the better-known mutual fund complexes. Most fund complexes have been in business for 50 years or more, which suggests that they are doing something right. But do not exclude smaller funds or fund families that you may have learned about through mutual fund evaluation services and financial publications. The advice of friends who are experienced investors is often helpful, as are suggestions from your lawyer or accountant. For investors who need more professional advice, reputable financial planners and stockbrokers can provide a useful service at an additional cost.

How should the canny investor read the prospectus? It would be unrealistic to suggest that you read the entire document from cover to cover. For the long-term investor, knowing the fund's objectives, investment policies, returns, risks, and total costs (sales charges, annual expenses, redemption fees, etc.) is probably sufficient. The shorter-term active investor should also know the fund's key transaction policies, such as how to redeem shares, how to exchange shares to another fund, and any transaction limitations such as redemption fees or limits on the frequency of fund exchanges.

Once you have narrowed down the field, turn to the supplemental information provided by the fund's sponsor, including a precise description of the fund, performance statistics, and financial information. After giving appropriate, but not excessive, weight to the fund's past performance—including both capital return and income return—and following the selection criteria I set forth in the earlier chapters, you'll be ready to make your fund selections. The canny investor will look through this information and make sure that all or at least most of it has been provided. If it has not, there are lots of fish in the sea, and there are many similar funds from which to choose.

What is required is that you do your homework and demand useful information, including the fund's compound rate of return over an extended period, the comparative standards used to evaluate this record, a clear statement of risk, and a thorough presentation of cost factors. If enough investors follow this process of selecting funds on the basis of the substance, breadth, and fairness of the information they provide, only those funds that make adequate information available to investors will ultimately remain in business.

THE THRIFTY INVESTOR

If mutual fund investors become more cognizant of the costs they are paying in the form of sales loads, management fees, and other fund expenses, and then act on this awareness, these costs will surely decline. It is as simple as that. If you purchase only the shares of the lower-cost funds (perhaps even by redeeming your investments in the higher-cost funds), mutual fund sponsors will quickly get the message. They'll learn that reducing their costs to investors will help them to increase the level of assets that they manage; failing to do so will lead to an unremitting capital outflow.

This is not a utopian concept. To some degree, this scenario is already unfolding in the mutual fund industry. Consider the money market funds. In a broad sense, the lower the level of a money market fund's expense ratio, the larger the amount of assets it attracts. All of the largest funds have expense ratios that are at or below the industry norm. As far as I am concerned, the jury is now in on the fee waiver issue that I discussed earlier: temporary fee waivers do draw in assets. But when the fund sponsor ceases to absorb the expenses of the fund it is promoting and the expense ratio rises to its “normal” level, much of the money that was enticed into the fund by cut-rate costs is enticed out, as it were, by other funds with durable low costs and high yields. That this reversal in cash flow takes place despite the sponsor's failure to notify its shareholders about any fee increases suggests that, at least in the money market arena, investors are not only thrifty but keenly aware of the yields that they earn. In fact, when the first money market funds were formed, several carried sales loads; however, this expense was simply too much baggage for the marketplace to accept, and the practice soon vanished.

In the bond fund arena, the importance of being thrifty appears not to have been fully recognized. It is as if profligacy, not thrift, were the central theme. It is remarkable to me that so many bond mutual funds with assets upward of $1 billion incur annual expenses in excess of 1.25%. At this cost, and assuming a gross yield of 7.0%, expenses consume something like 18% of a fund's income, reducing the fund's dividend distribution to its shareholders by that same 18%. It is astonishing to see that more than half of all bond funds are actually sold with sales charges. The net result is that investors earn their net income (assuming a 5% load) on only 95% of their assets. If you hold a bond fund for five years, the result is an annual sacrifice of 1% each year in yield. At a 1.25% expense ratio, the fund's combined annual costs and sales charges over a five-year period are 2.25%, consuming nearly one-third of the fund's 7% gross yield.

As I noted earlier, the ability of any bond fund manager to earn excess returns sufficient to offset these prodigious costs is quite limited. Thus, it is contrary to expectations that nearly 70% of bond fund assets are held by load funds and only about 30% are held by no-load funds. There are hints that these percentages are converging, but a major shift can transpire only when bond fund investors act on their thrifty impulses.

In the stock fund arena, the presales-charge records of load and no-load funds are generally comparable. After adjusting for sales charges, no-load funds carry a distinct advantage. The marketplace seems to see this difference, and nearly 40% of the assets of all stock funds are represented by no-load funds. Most equity funds with very high operating expense ratios (say, over 2.5%) have attracted limited amounts of assets. It is difficult to determine, however, just where the link among high expenses, low performance, and a small asset base begins. Nonetheless, it seems clear to me that two trends will develop in the years ahead: (1) all equity funds—particularly the mainstream funds—will feel the cost pressure as price competition in the marketplace increases and (2) assuming that index funds “work,” those that attract the most assets will be the ones that do not charge sales loads and have the lowest operating costs.

THE ACTIVE INVESTOR

Once you own shares of a mutual fund, you gain “certain inalienable rights.” Among them are the right to vote proxies, the right to express your opinions to management, and finally the ultimate right, the right to “vote with your feet” and redeem your investment in the fund. This final option frightens fund sponsors greatly. Not only does it suggest that they have somehow failed the investor, but it reduces the fees they receive from managing the fund.

The right to vote proxies is significant, since management fee increases must be approved by mutual fund shareholders. (Curiously enough, so must the almost unheard-of proposals to reduce fees.) It follows that, since investors—after reading the fund's prospectus—tacitly approved the management fee when they purchased their shares, they will want to examine carefully any proposal to change the terms of the contract. Each shareholder must vote, and vote intelligently.

To do so, you will need complete and candid information on why a fee increase is being requested. If the proxy does not provide it, a no vote should be automatic. Many proxies, sadly, fall far short of adequate disclosure. Begin with the cover page. It often calls attention to “a vote to amend the fund's investment advisory agreement.” Rarely, if ever, does it state “a vote to increase the fees you pay to the fund's investment manager by 25%.” So careful examination of the details of the proxy is a must.

Fair reasons for a management to increase its fee rates might be “the need to have the resources to hire additional investment professionals,” or “to expand the range of services provided to shareholders.” Very few proxies, however, state that these are the reasons. Most suggest that, after long consideration, the fund's directors have approved the fee increase requested by the management company, since the fund's fee rates were below industry norms.

This reason seems more like a rationalization. (Must not half of the funds in the industry always have below-average fees and half always have above-average fees?) The real reason for most fee rate increases is to improve the profitability of the management company. Remember that the dollar amount of the fee has automatically increased—often enormously—with the increase in fund assets, although in many cases the fee rate is scaled down moderately as fund assets increase. While higher profits for fund managers are not necessarily wrong in the abstract, shareholders are entitled not only to a candid statement of that profit objective but a clear financial tabulation showing the revenues that the adviser receives from the fund both before and after the fee increase, the nature and extent of the fund's expenses, and the margin of profit it realizes on operating the fund.

If an adviser expends $0.50 out of each $1.00 of fee revenue to operate the fund, the pretax profit margin is 50%. If this margin is to go to 75%—an astonishing increase, but hardly unprecedented—let it be so stated. While huge compared to most industries, a 50% profit margin has not been uncommon among the larger mutual fund complexes. In order to merit your favorable vote, the management company should provide these profit margin figures (not only for the fund at issue but for the funds in the complex in the aggregate) and address their reasonableness.

Fund shareholders seem to ignore the issues presented in proxies, even when the fund provides reasonable disclosure. Shareholders of one investment company recently voted to approve a 31% fee increase to a manager who was already making a pretax profit equal to 85% of its gross revenues. Table 14.1 shows the figures, as published in the proxy. The fee paid to the manager rises by some $1.6 million, to more than $7 million. Since the manager's expenses remain at about $800,000, the manager's profit, too, rises by $1.6 million, a 40% increase. As a result, the profit margin on this particular fund rises from 85% to 88%, a level that is surely amazing.

A second issue that demands that shareholders vote is the 12b-1 distribution plan discussed in Chapter 10. Sadly, since more than half of all funds already have such plans, the remaining opportunities to vote to approve or disapprove new plans are likely to be few. And, given the increasingly controversial nature of 12b-1 plans, the likelihood of any funds having the temerity to propose to increase such distribution fees seems remote in the extreme. Suffice it to say that if the fund plans to spend any of the assets that you as a shareholder have entrusted to it simply to bring additional assets into the fund, the justification for the expenditure should be clearly articulated, both in understandable conceptual terms and in detailed financial terms. Otherwise, “just vote no.”

Freedom of speech to fund management is another inalienable right of fund shareholders. Few investors are aware that the management of any enlightened mutual fund is interested in the opinions of the fund's shareholders. In my experience, shareholders are rarely heard from except in matters relating to performance and the accurate processing of their accounts. One major area in which shareholders should make their opinions known is the quality of the communications they receive from their fund. Many annual reports are superficial and incomplete. Any annual report worth its salt should meet the standards I suggested in Chapter 8.

Many funds fall short of providing all—or indeed any—of this information to their shareholders. In fact, these sins of omission are more the industry norm than the exception. Most funds seem to believe that performance comparisons are odious and, implicitly at least, that “there is no fair standard against which we may be measured.” One assumes the fund's independent directors themselves receive some comparison and evaluation of the fund's performance. An obvious solution is to make that information available to the actual owners of the fund—the shareholders. There is nothing wrong with presenting an imperfect comparison and then describing its limitations. But every fund simply must give its investors appropriate and enlightening information in its annual report. The active investor should demand no less.

In April 1993 the SEC, presumably frustrated by the industry's recalcitrance, adopted a requirement that mutual funds provide comparisons of their performance relative to an appropriate index along with a narrative discussion of strategies and factors that materially affected the fund's performance during the year, along with a ten-year comparative chart. While this requirement is a welcome step forward, funds have been given the option of providing the information either in their annual reports or in their prospectuses. Which alternative funds will choose remains to be seen. But it is ironic that many fund sponsors, whose portfolio managers rely on full disclosure from corporations, must be required by a federal agency to provide full disclosure to the shareholders of the funds they manage.

While it is more difficult to articulate, shareholders have the right not only to hold the fund to comparative standards that are consistently applied from year to year but also to a candid evaluation of these returns by the fund's chief executive officer. (In the typical case, the fund's CEO—responsible for appraising the results—is also the CEO of the investment adviser—responsible for generating the results. As a result, reporting to shareholders with candor is no mean challenge.) The active investor should demand fund reports that begin with something like, “last year, your fund's performance was inferior both absolutely and relative to fair competitive standards,” rather than, for example, “the year's most important event was the expansion of IRA eligibility,” or “your fund's assets increased by $100 million during the past year.”

But the issue does not end with fair presentation of the facts and figures of the mutual fund's performance results and at least some perspective on what they mean. Overall, what is involved is a spirit of candor, in which a fund's failures receive at least as much attention as its successes, and its problems as much emphasis as its opportunities. If even 50 active investors would place this demand for candor before the fund's chairman (copies to the fund's independent directors), I believe many funds would respond affirmatively, for two reasons. First, the fund's management may not have previously considered the issue all that important and may now realize that investors care. Second, the fund's management will ultimately act with an enlightened sense of the fund's (and the adviser's) long-run self-interest.

If the demand for candor is not met even when you let your opinions be known, you can take an even more forceful action. The ultimate nightmare of fund managers is that you vote with your feet, redeem your shares, and walk away from the fund. Of course, many investors redeem their shares under the most normal of circumstances. Reallocating your assets in order to increase or reduce your common stock exposure is one obvious reason. Achieving your original financial goals demands redemption (e.g., sooner or later your accumulated education fund will be spent on college tuition bills). Unfortunately, leaving a fund because the fund has let you down may involve otherwise unnecessary penalties. The most obvious are (1) the cost of the sales commission you originally may have paid, especially onerous after a short period of time (i.e., a 5% sales commission reduces a fund's one-year return by −5%, but a five-year return by “only” −1% per year); and (2) the taxes payable on any capital gains you would realize if the net asset value of your shares has increased. Nonetheless, redemption of shares is the ultimate weapon of the active investor.

THE SKEPTICAL INVESTOR

Unlike the active investors, skeptical investors do not yet own a particular fund. They are looking at the information presented to them and deciding whether or not to invest their assets. In this age of aggressive fund marketing and promotional hype, the industry has earned their skepticism. Three areas come quickly to mind: in advertising, the exaggeration of the importance of a fund's past performance; in calculating yields, the inadequate disclosure of low credit quality or substantial use of risky derivative instruments to obtain exaggerated yields; and in promotion, the development of new fund concepts that are based on unproven or untested principles.

All investors want funds that provide good performance. And all funds seek to provide it. But despite overpowering evidence to the contrary, investors seem to believe that past performance is the precursor to future performance. Fund sponsors—good businessmen all—respond to investors' predispositions by exploiting a fund's past performance as if there were some link, however tenuous, between past and future returns.

The most blatant manifestation of this “past performance syndrome” is in mutual fund advertising, especially advertising that proclaims a

fund #1, even as the small print reveals that the fund is first only in some limited group, of some limited size, over some limited period. Given the large number of these limited universes, literally hundreds of funds can lay claim to #1 status at any time. And when a particular fund inevitably regresses to the mean, it can be replaced in the advertising by another fund with #1 credentials offered by the same sponsor. If the sponsor operates many highly specialized aggressive funds, this option is always available.

What is important about this issue is something that the sponsors must know but do not say: the chance that a #1 fund in, say, the past ten years will repeat as #1 in the next ten years is essentially zero. The skepticism of the investor who pays little heed to such claims will be well rewarded. In fairness, the advertisements state, albeit in the proverbial small print, that past results may not recur in the future. But surely it must be obvious that investors cannot put their money to work today and achieve yesterday's returns. Yesterday is now history. So the skeptical investor should ask the sponsor: “What are the chances this record will be repeated in the years ahead?” If the answer is not candid (“The chances are near zero.”), move along to the next fund on your list.

Extreme examples of this type of advertising abound. Take a look at three sample headlines:

• “The #1 Pacific Fund.” This fund “ranked #1 for the ten-year period ended September 30, 1991, out of three (italics added) Pacific Region Funds.” The sponsor's sister Pacific Fund—different only in cost structure—“ranked #3.” What a rare combination of first and last in a single ad! By actual measurement, the “#1” figure was 19 inches high; the “#3” was one-sixteenth of an inch high.
• “Now Ranked #1 for Performance*” “The Fund That's Performed Through Booms, Busts and 11 Presidential Elections.” The asterisk referred to a small footnote confessing that this fund was first, not among all mutual funds for the implied 44 years, but first during the third quarter of 1992 among 27 growth and income funds with assets between $250 million and $500 million.
• “They Must be Smart.” This was the caption on an ad screaming, “#1 of all mutual funds for 30 years.” Ignored: a rank of #496 for the previous ten years, #455 for the previous five years, and #1,532 for the previous year.

In their own grotesque way, ads like these have become their own parodies. They count for nothing.

Another, more insidious, form of fund advertising became popular in 1992. In a marketplace where investors are seeking higher yields, ads that promise higher yields prompt high response rates from investors, so bond funds are managed to provide such higher yields. To me, this stands the proper priorities on their head: the objectives and strategies of the fund should come first, the advertising cachet second. This kind of competition may be fair enough, but only if the risks of obtaining higher yields are explicitly and prominently articulated.

The risks are too rarely disclosed and, with the changing structure of the securities markets, can easily be obscured. In the “old days,” if you knew only the quality, maturity, and cost structure of bond funds, you could make wise investment selections. Today, however, with derivative instruments (securities broken up into “tranches” with varying claims on principal and income); with many foreign bonds available (incurring, in general, both currency risk and sovereign risk); with varying prepayment provisions (under which mortgage holders may repay their obligations as interest rates fall); and with a variety of accounting options to let the fund maximize its stated yield, making intelligent comparisons among mutual funds is a daunting task. Under these circumstances, “gaming” yields is an easy game indeed for fund sponsors to play.

So when confronted with two short-term bond funds of uniform quality and maturity but a substantial yield differential, the skeptical investor should ask why and how. Many times the higher apparent yield results from a shift of capital return to income return, so consider total return as well as stated dividend yield. The issues posed are complex, requiring careful analysis and guidance. Never lose sight of the fact that, in the financial markets, when costs are held constant there is no extra reward without extra risk. A skeptical approach to investing can pay dividends.

New fund concepts—often glamorized as “new products” or, presumably even better, “hot new products”—are also dangerous. It flies in the face of common sense to think that, after all these years, some new secret can be discovered in the financial markets. Yet the industry continues to offer a variety of fund products that are either unsound, misunderstood, or inappropriately compared with other types of funds. Some examples are the government-plus fund, the prime rate fund, the short-term global fund, and the adjustable rate mortgage (ARM) fund.

THE ROLE OF THE INDEPENDENT DIRECTOR

So far in this chapter, I have placed on mutual fund shareholders the onus of being the agents of change in the industry. That may be asking too much, since each investor is a very small fish in a very large ocean. There is in fact another way to bring about change in the industry, involving not tens of millions of fund investors but several hundred fund independent directors. As a fund shareholder, you elect them. They are your designated representatives, and they owe you a trusteeship duty.

The independent directors of a mutual fund—those not affiliated with the fund's management company—normally comprise a majority of a fund's board of directors. They are therefore in a position to control the activities of the fund and, in particular, to assure that the fund is managed solely in the interests of its shareholders. Independent directors must be asked questions like these:

• Are you honoring, in every respect, your fiduciary obligations to the fund shareholders you are responsible for representing?
• Are you negotiating fees with the same spirit and determination as if you were negotiating fees to be paid to your own trustees, responsible for your own and your family's investments?
• Would you terminate the services of your own trustee if your investment results were persistently inferior? Would you be willing to do the same with the fund's management company under the same circumstances?
• Have you considered the extent to which the substantial economies of scale resulting from the fund's growth are enjoyed by the fund's managers, as distinct from the fund's shareholders, for whom you are a fiduciary?
• Have you carefully evaluated what portion of the fees paid to the managers is expended on investment advice? On marketing and promotion? What portion remains as the manager's profit? Does the profit earned before the deduction of promotional expenses bear a reasonable relationship to the advisory fees received?
• Have you raised the issue of expenditures on distribution activities? Have you received a satisfactory answer to the question of why larger assets benefit the fund's shareholders? If they do, how and at what cost? Do you know if the 12b-1 plan is accomplishing its goals; if it is not, have you considered its termination?
• Do the advertising and marketing materials prepared by the sponsor to promote the sale of the fund's shares meet the standards of full disclosure you would insist on were you purchasing shares of the fund? Do you own shares in the fund? If it is a load fund, did you pay a commission to purchase your shares?
• How carefully do you read the fund's annual report? Is it candid, complete, and forthright, conveying bad news with the same emphasis as good news? Are the highlights of the fund performance comparisons that you review each year as a director presented to the shareholders you represent? Should they be? Are you aware of the potential conflict when the chief executive of the fund's management company writes the annual reports in his capacity as chairman of the fund's board?
• How often do you remind yourself that the express policy of the law of the land—the Investment Company Act of 1940—is violated “when investment companies are organized, operated, and managed in the interest of investment advisers, rather than in the interest of shareholders”?

Such questions are not hypothetical. And, as a matter of law, they apply not only to the independent directors but also to the directors who are owners or employees of the investment adviser (“affiliated directors”). You should send to the directors you have elected a quiz asking them to answer these specific questions. I believe that, if asked to speak candidly, most directors would answer at least some of them in the negative. That response cannot stand.

BUILDING A NEW MUTUAL FUND INDUSTRY

It must be clear from this litany of cautions that many mutual fund sponsors have become aggressive marketing machines, clever to a fault, focusing on increasing their assets under management so as to increase the revenues they receive from management fees and sales commissions, the better to increase their profits.

That objective, of course, is “the American way.” And there is nothing fundamentally wrong with this phenomenon. The problem is that managing other people's money—managing your money—is a precious responsibility requiring, not only full disclosure of all known risks, rewards, and costs, but also high standards of commercial conduct and even higher standards of trusteeship and fiduciary duty. Trusteeship, indeed, has been part of the American ethic at least since Justice Samuel Putnam wrote his prudent man rule nearly 200 years ago, and part of British common law since time immemorial.

To the extent that asset gathering has superseded fiduciary duty as the industry's hallmark, fund shareholders are not well served. I emphasize that the spirit of fiduciary duty has not vanished. Rather, it has moved from the driver's seat to the back seat, subservient to the worship of market share. In the final analysis, as a mutual fund shareholder, you would be better served if these priorities were reversed. They will be, if only one or more of these three developments reaches fruition.

• First, mutual funds will respond if shareholders become more canny, more thrifty, more active, and more skeptical. If enough shareholders exhibit these traits, especially if enough are willing to vote with their feet, the fund industry will quickly get the message. If you demand better disclosure, greater candor, lower cost, and a fair share of the economies of scale, the sponsors will provide all of them.
• Second, as shareholders make their opinions known, the independent directors of mutual funds should become more aware of the essential nature of their trusteeship and their fiduciary responsibilities. Many smaller shareholders—and more than a few larger shareholders—do not have enough financial experience, information, or financial sophistication to fully understand the risks, returns, and costs of the funds that they own. The independent directors must accept responsibility for the oversight of the proper management of shareholders' assets at a proper cost. That objective, indeed, is arguably the major purpose of the Investment Company Act of 1940. The independent directors must set fees at “arm's length.” They must also assure themselves that the communications—advertising, marketing materials, and sales presentations—used to attract new shareholders are candid and complete, and that annual reports to the fund's shareholders are no less so. If an enlightened sense of self-interest on the part of fund directors does not soon force this change, a federal law establishing a statutory standard of fiduciary duty for fund directors should be enacted.
• Third, failing the success of the first two conditions, the very structure of the mutual fund industry must change, essentially placing the fund in the driver's seat and relegating the management company to the back seat. From a mutual fund standpoint, that indeed would be the world turned upside down. But it would be the functional counterpart of the time-honored structure of the ordinary business corporation, in which the owners of the corporation (in this case, the fund shareholders) control, through their board of directors, its affairs. Ordinary corporations do not need to go out and hire other corporations, with separate owners, to manage their affairs. Mutual funds do precisely that today; some combination of shareholder demand, enlightened self-interest, competition in the marketplace, and “more sweeping steps” under the law may someday compel a reversal.

SUMMARY

The quotation at the start of this chapter was incomplete. The full quotation is: “The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings.” In one way or another, the time for mutual fund shareholders to be underlings will surely end. You are the owners of the mutual fund corporation, and you are entitled to have it operated solely in accordance with your interests.

One would have to be an idealist to believe that shareholder activism will soon change the nature of the mutual fund industry. Failing that development, one would have to be even more of an idealist to expect that independent director activism will do so either, even by the end of this century. And failing that development, only a consummate idealist would expect that a structural change as fundamental as the reorganization of the very management structure of the industry—from external to internal—will occur in our lifetimes. But I believe that idealism has its place. Simply considering these issues will be a major asset for intelligent investors as you select the mutual funds in which to place your trust.