The regulatory microscope is zeroing in on mutual funds and hedge funds. Richard Baker (R-LA), chairman of the House Financial Services Capital Market Subcommittee, recently urged Securities and Exchange Commission Chairman William Donaldson to investigate mutual fund fees. And Baker and Michael G. Oxley (R-OH), chairman of the House Financial Services Committee, plan to hold hearings designed to determine whether hedge funds are appropriate for retail investors.
At a March 12 hearing on mutual fund fees held by Baker, John Bogle, founder of Vanguard, testified that mutual funds are overcharging investors. “Over the years, the mutual fund industry has changed in many ways that have ill-served investors,” he told the committee. “With substantially rising expense ratios and portfolio turnover, the gap between equity fund returns and stock market returns has doubled.” Bogle said that despite the mutual fund industry’s huge growth in assets ($56 billion in 1978 to $6.4 trillion in 2002) and the industry’s “huge economies of scale,” the expense ratios of the average mutual fund during the same period have skyrocketed from 0.91% to 1.36%, a 49% increase. Bogle’s comments were enough to prompt Baker to urge the SEC to further investigate mutual fund fees, as well as the diligence of fund directors and trading costs. Baker expects to get regulatory or legislative remedies from Donaldson by June 11.