‘The Importance of Being Long-term’: Vanguard’s William McNabb on What’s Ahead for Investors
William McNabb became chief executive officer of The Vanguard Group on August 31, 2008 — two weeks before the financial world went into free fall. On the evening of Sunday, September 14, the day Lehman Bros. declared bankruptcy, he was in Washington, D.C., welcoming institutional investors to the mutual fund company’s bi-annual conference. The next morning, as world ticker tapes bled and “all hell was breaking loose,” McNabb found himself in front of the company’s 300 largest pension fund clients, “talking to them about the importance of being long-term, balanced and diversified, and taking a very long-term perspective on the markets.” As he spoke, he recalled, a “soundtrack” looped in his head: “The world is melting down. What are we going to do?”
“It’s been an interesting adventure,” McNabb told an audience gathered for a recent Wharton Leadership Lecture. “We have come a long way in these past few years.”
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A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. While there is no legal definition of the term “mutual fund”, it is most commonly applied to open-end investment companies, which are collective investment vehicles that are regulated and sold to the general public on a daily basis. They are sometimes referred to as “investment companies” or “registered investment companies”. Hedge funds are not mutual funds, primarily because they cannot be sold to the general public. In the United States mutual funds must be registered with the U.S. Securities and Exchange Commission, overseen by a board of directors or board of trustees, and managed by a Registered Investment Advisor. Mutual funds are subject to an extensive and detailed regulatory regime set forth in the Investment Company Act of 1940. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U.S. Internal Revenue Code.
Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. Today they play an important role in household finances, most notably in retirement planning.
There are three types of U.S. mutual funds: open-end funds, unit investment trusts, and closed-end funds. The most common type, open-end funds, must be willing to buy back shares from investors every business day. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange. Non-exchange-traded open-end funds are most common, but ETFs have been gaining in popularity.
Mutual funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds. Funds may also be categorized as index (or passively managed) or actively managed.
Investors in a mutual fund pay the fund’s expenses, which reduce the fund’s returns and performance. There is controversy about the level of these expenses.
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