What made things worse is that some fund-company owners and managers–Dick Strong of Strong funds; Gary Pilgrim, the P in PBHG Funds; 15 professionals at the Putnam funds–stand accused of gaming their own funds. It’s like a parent who abuses his child for profit.
But the real scandal, as longtime critics like Vanguard founder John Bogle point out, isn’t what funds have done illegally–it’s what they’ve done legally. By Bogle’s math, stock mutual funds’ fees, expenses and sales charges–hidden deep in fine print–total about 3 percent a year. That’s a huge proportion of the 10 percent return the stock market’s generated over time. By contrast, some of Bogle’s beloved index funds–which try to match the market rather than outperform it–cost less than half a percent.
Bogle’s got an audience now. In what’s designed as a trendsetting deal, Alliance Capital is settling with Spitzer and the SEC by reducing its mutual-fund fees by 20 percent for five years, saving investors about $350 million. Alliance will also fork over $250 million to fund shareholders. Hitting fund companies in the wallet won’t make them produce good investment results. But at least Middle America will be paying less for crummy results.
