Based on cutting-edge research by leading corporate critic Louis Lowenstein, The Investor’s Dilemma: How Mutual Funds Are Betraying Your Trust and What to Do About It reveals how highly overpaid fund sponsors really operate and walks you through the conflicts of interest found throughout the industry. Page by page, you’ll discover the real problems within the world of mutual funds and learn how to overcome them through a value-oriented approach to this market.
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Book Description
Editorial Reviews
Review
". . . a deep dive into the role of mutual funds as owners of corporate America," says Mr. Davis. The book explores conflicts of interest between fund managers and investors. "It's an eye opener for citizens who are thinking about where they can safely and properly put their money."
The Wall Street Journal
The Wall Street Journal
Some Mutual Fund Numbers Look Great, but for Whom?
THE public stock markets are in the throes of one of the biggest and most egregious financial scandals in modern history, according to Louis Lowenstein. The scandal has little to do with highly publicized abuses like market timing or insider trading. It is not directly related to the current credit and subprime mortgage crises.
Instead, it involves the $10 trillion in life savings that 90 million individual investors in the United States have entrusted to mutual funds.
This unprecedented scandal is documented in succinct but gory detail by Mr. Lowenstein in The Investor’s Dilemma: How Mutual Funds Are Betraying Your Trust and What to Do About It (Wiley, $29.95). Mr. Lowenstein is a lawyer, a former business executive and a professor emeritus of finance and law at Columbia Law School. Like Warren E. Buffett, he is a proud disciple of the “value investing” principles outlined by Columbia professors Benjamin Graham and David L. Dodd in 1934.
Mr. Lowenstein is also a heck of an investigative reporter, as well as an astute financial adviser.
Here’s the nut of the mutual funds industry scandal, as summarized by Mr. Lowenstein: “There is a profound conflict of interest built into the industry’s structure, one that grows out of the fact that the management companies are independently owned, separate from the funds themselves, and managers profit by maximizing the funds under management because their fees are based on assets, not performance.”
As a result, the vast majority of mutual funds are far more interested in taking money from investors than in making money for them, according to Mr. Lowenstein.
From 1980 to 2004, the assets of stock funds increased 90 times, from $45 billion to $4 trillion. During that same period, fees paid by investors and collected by fund managers via fund management companies soared from $288 million to $37 billion. What’s more, the fund managers received their fees regardless of whether the prices of the stocks they selected went up or down.
Not surprisingly, mutual funds continue to multiply like rabbits. By the beginning of 2007, there were about 4,800 mutual funds with $6 trillion invested in stocks and $3 trillion more invested in bonds and money market funds.
“The remarkable growth is a reflection, no doubt, of pervasive anxiety about corporate pension plans and Social Security, a sense that people had better take care of themselves or they could be left out in the cold in their so-called golden years,” Mr. Lowenstein observes.
But alas, the performance of the vast majority of mutual funds ranges from dismal to atrocious, especially in comparison to the highly profitable performance of the management companies that own them. The record of T. Rowe Price Group, which is widely regarded as a respectable mutual fund family, is one of Mr. Lowenstein’s many graphic cases in point.
From 2001 to 2005, T. Rowe’s mutual fund assets under management soared 70 percent to $270 billion; the profit of the management company that owned the funds more than doubled. But most of the investors in T. Rowe’s five leading large-cap growth funds were treading water. During the five-year period ended Dec. 31, 2005, two of the funds gained 1.26 percent and 1.38 percent, barely outperforming the 0.54 percent return of the Standard & Poor’s 500-stock index. The other three T. Rowe funds posted negative returns, ranging from minus 0.26 percent to minus 2.06 percent.
Mr. Lowenstein cites several structural reasons for the failure of mutual funds to serve the best interests of their investors.
One reason is that most mutual fund managers do not, as Mr. Lowenstein puts it, “eat their own cooking.” From 2003 to 2006, for example, T. Rowe’s chief investment officer amassed ownership or control of stock in the management company worth over $75 million. But his total personal investment in T. Rowe’s mutual funds was only $1 million.
Mr. Lowenstein contends that most mutual funds intentionally set low performance standards for themselves. Their goal, he says, is not to beat the S.& P. 500 average or the average of a particular industry sector, but simply to “track,” or approximate, those averages so that their managers “don’t look bad.”
The mutual fund industry offers 11,000 different asset classes, ranging from high-tech to old economy stocks that are sold to investors “like soap.” But rather than dealing directly with the public, mutual funds amass up to 90 percent of their money through retail brokerage firms, which, in turn, enjoy “pay to play” revenue-sharing arrangements. In 2005, for example, the Edward Jones brokerage firm collected a whopping $172 million from a favored seven mutual fund groups to which it had referred its retail clients.
Mr. Lowenstein acknowledges that indexing a stock portfolio can have its virtues. He notes that a mutual funds analyst at Morningstar recently described T. Rowe Price funds as the type “you would feel good about your granny investing in,” though Mr. Lowenstein hastens to add, “Maybe your grandma, but not mine.”
Mr. Lowenstein balances his critique of rapacious mutual funds with an analysis of two relatively new funds, Wintergreen and Fairholme, that buck the prevailing trends.
THE Wintergreen and Fairholme business models mirror the Graham-Dodd philosophy of focusing on a few carefully selected stocks rather than diversifying in the name of safety, which is typically a euphemism for lazy research, Mr. Lowenstein says. Where the average mutual fund held 160 stocks, Wintergreen held 41 stocks and Fairholme held just 18 when the book was written. The annual returns of both funds were above 16 percent.
Mr. Lowenstein discloses that he owns stakes in the Wintergreen and the Fairholme funds. Given his trashing of most of their competitors, he may be faulted for not specifying the exact amounts of what he describes as his “modest positions.”
But at the risk of mixing metaphors, it seems clear that Mr. Lowenstein puts his money where his mouth is, and that the type of investing he praises is the kind of cooking that the general public deserves to be eating as well. --by Harry Hurt, New York Times, April 20, 2008
"Most would be well-advised to learn about mutual funds. The Investor's Dilemma is a good start."--The Free Lance-Star
"A valuable text for passive investors."--Barron's
From the Inside Flap
Over 90 million individuals, in 55 million households, own mutual funds. But while one in every two households has entrusted their life savings to these funds, the industry has betrayed their trust. Intent on gathering ever more assets, fund families spew out new funds—600 in just two years—while existing funds flip stocks and even managers, with a calloused indifference to your welfare. It works, at least for the fund families. And thanks to an intensive marketing initiative, some of them now have as much as $1 trillion under management.
That's why Louis Lowenstein has written The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust and What to Do About It. Based on fresh, cutting-edge research by a leading corporate critic, this book reveals how highly overpaid fund sponsors really operate, using, for example, narrow benchmarks that will make even a mediocre fund look good. Step by step, Lowenstein walks you through the conflicts of interest, and even outright theft, giving the reader an inside look at some of the best-known fund groups.
Happily, Lowenstein also takes a direct, hands-on look at a representative group of tried-and-true value funds that have demonstrated a commitment to their investors' welfare. Instead of proliferating new funds every few months and diluting the results for those already there, this select group invests with patient research, holding their choices for years at a time and investing their dollars alongside yours. Along the way, Lowenstein discusses the important factors to look for when picking a stock fund. To illustrate the process, he analyzes two representative funds that are not too large and still open to new investors.
Even as this book shines a harsh light on much of what is wrong with the mutual fund industry, it also helps illuminate the brighter corners of today's investment environment. Written in an engaging and informative style, The Investor's Dilemma skillfully examines the real problems within the world of mutual funds and outlines a value-oriented approach to this market that will allow you to achieve investment success.
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Most Helpful Customer Reviews
6 of 6 people found the following review helpful:
5.0 out of 5 stars
Dilemma Diffused,
By Thurston Beaumont (Tennessee) - See all my reviews
This review is from: The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust And What To Do About It (Hardcover)
In THE INVESTOR'S DILEMMA the writing is so clear and the case so well laid out and logically built that I feel I've had the most enlightening new look at investing...at how to participate in the growth of the world economy with but a few funds.
The book's concrete examples, naming names and showing specifics...rather than simply expounding theory...is compelling. As a longtime (26 years) investor in Sequoia...my only fund for years, I was extremely interested to read about Fairholme and Wintergreen and am now a shareholder in those, too. In the face of so many niche funds, sector funds and "style boxes", Prof. Lowenstein's pointing out that these three great managers are now free to invest all over the world in any size company they like is an extremely important point...one that can greatly simplify an investor's job. THE INVESTOR'S DILEMMA is a beautifully written lesson.
7 of 8 people found the following review helpful:
5.0 out of 5 stars
A Terrific Read For Any Mutual Fund Investor,
By My Opinion "For What It's Worth" (La Canada, CA) - See all my reviews
Amazon Verified Purchase(What's this?)
This review is from: The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust And What To Do About It (Hardcover)
Your financial planner and mutual fund advisor are not going to recommend that you read Louis Lowenstein's book, "The Investor's Dilemma", but if you want to be a knowledgeable investor, I highly recommend that you do. Fund boards of directors and management companies are exposed for their betrayal of investor interests. Management fees continue to grow, while the benefits of increased assets under management go into the pockets of the publicly-owned and privately-held management companies. And the dreaded 12b-1 fees continue to be assessed to the fund holders enabling the management companies to further enhance their take at the expense of the fund investors.
The final chapter, "How to Pick a Mutual Fund", provides excellent guidance on how to go about identifying funds worthy of your hard earned savings. My only disappointment was that Mr. Lowenstein only specifically recommends two funds, one of which I already own. With all his research, I would have thought he could have come up with more. Finally, the reader is left with somewhat of a mystery by the author. By way of full disclosure it is stated that "the author owns relatively modest positions in both funds" recommended. He goes on to recommend that investors own no more than three (four, tops) stock funds. So, where does Mr. Lowenstein invest the rest of his money? Does he eat his own cooking? I hated to see this book end. Perhaps there will be a sequel that will provide further guidance on selecting worthy funds and fund managers with more specific recommendations.
8 of 10 people found the following review helpful:
5.0 out of 5 stars
A Must Read for anyone interested in Mutual Funds,
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This review is from: The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust And What To Do About It (Hardcover)
The mutual fund industry has depended, for success, on its ability to portray itself as complex - too complex for the many millions who invest to know or understand how it actually works. Lowenstein converts that complexity into a clear, understandable explanation, while defining the myriad conflicts of interest which short change those investors while creating incredible wealth for the managers. Amazingly, he also sets out easy to follow methods of choosing a fund which protects its investors and their money, even though there are not many.
The book is superbly researched well organized and written with great warmth.
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Front Cover | Front Flap | Table of Contents | First Pages | Index | Back Flap | Back Cover | Surprise Me!
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Key Phrases - Statistically Improbable Phrases (SIPs):
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growth stock fund, new economy stocks, fund complexes, rational investors Key Phrases - Capitalized Phrases (CAPs): (learn more)
Wall Street, Perfect Storm, Growth Fund, Rowe Price, The Industrialization of Mutual Funds, American Funds, Greed Is Good, Warren Buffett, United States, Business Week, Massachusetts Investors Trust, Edward Jones, Longleaf Partners, Merrill Lynch, First Eagle Global, Black Monday, The Anatomy of the Stock Market, Legg Mason, Bob Rodriguez, Smith Barney, Mutual Beacon, Black Rock, Warp Speed, Painful Birth, Franklin Resources Browse Sample Pages:
Front Cover | Front Flap | Table of Contents | First Pages | Index | Back Flap | Back Cover | Surprise Me!
growth stock fund, new economy stocks, fund complexes, rational investors Key Phrases - Capitalized Phrases (CAPs): (learn more)
Wall Street, Perfect Storm, Growth Fund, Rowe Price, The Industrialization of Mutual Funds, American Funds, Greed Is Good, Warren Buffett, United States, Business Week, Massachusetts Investors Trust, Edward Jones, Longleaf Partners, Merrill Lynch, First Eagle Global, Black Monday, The Anatomy of the Stock Market, Legg Mason, Bob Rodriguez, Smith Barney, Mutual Beacon, Black Rock, Warp Speed, Painful Birth, Franklin Resources Browse Sample Pages:
Front Cover | Front Flap | Table of Contents | First Pages | Index | Back Flap | Back Cover | Surprise Me!
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