Dollars and Jens
Tuesday, March 09, 2004
I promised an entry on mutual funds, in response to Buffett's letter, so here goes.
Buffett's complaint, in a nutshell, is that directors of mutual funds -- even more than directors of companies -- rubber-stamp management teams. In theory, they're supposed to negotiate for shareholders and represent shareholder interests; in practice, shareholders don't have any way to hold management accountable other than to sell their shares.
In my opinion, though, the practice isn't all that bad for shareholders, since the mutual funds are required to cash out their shares at a fair price. When management of a regular company is unaccountable, shareholders have to sell shares to each other -- nobody having an obligation to buy -- and management retains control of a substantial pool of capital that would be better managed by someone else.
I do think it's silly -- at best -- to have a board of directors that doesn't serve a purpose. I'd like to see the industry move either in the way Buffett suggests -- where boards of directors are serious -- or in the opposite direction -- where you entrust your money to, say, Fidelity, to manage, rather than to a fund's board of directors. The problem isn't the system itself so much as the charade.