Remaining Vigilant on Stewardship
Stewardship in the fund industry has improved markedly since the 1980s and 1990s, and we must not let it slip.
This year marks the 75th anniversary of the 1940 Investment Company Act, a landmark piece of legislation that set the U.S. fund industry on the path to success. Importantly, the 1940 Act places stewardship at the forefront of the industry. It protects investors by creating safeguards and checks on the management of their money, not the least of which is the choice to make these entities investment companies, not investment contracts. There's no stewardship in the writing of a contract. One party writes it, and the other chooses whether or not to sign. In contrast, stewardship is front and center in the corporate model where the asset manager works for shareholders and an independent board is tasked with representing and protecting shareholder rights.
While the 1940 Act brilliantly lays out the letter of the laws by which the U.S. fund industry operates, its spirit slowly faded as fund companies chose to downplay the corporate nature of funds and the notion of funds as consumer products took root. The situation deteriorated so much that by the time I joined Morningstar in the mid-1980s, it was common to go to fund industry events and be told that "mutual funds are sold, not bought," reflecting the belief that investors were sheep to be fleeced, rather than owners to be served. The prevailing attitude was that it was a seller's market and investors' rights or protections need not be top of mind.