David Swensen Calls Mutual Funds an Ugly Morass

The mutual fund industry is not an investment management industry. It's a marketing industry. There's an irreconcilable conflict in the mutual fund industry between the profit motive and fiduciary responsibility.
— David Swensen

Americans have sunk more than $29 trillion into mutual funds as of January of 2025, even though David Swensen called them an "ugly morass."

Mutual funds are the junk food of the investment world. They're usually bad for you, but the marketing is so compelling that you buy them anyways. That's what David Swensen is pointing to with his quote.

Swensen was the investing superstar who managed Yale University's endowment for the 36 years to 2021. He produced an annualized gain of 13.7% per annum. A single dollar invested with Swensen would have been worth nearly $103 by the end of his run. The S&P 500 over the same time frame would have earned you less than half that, just over $50.

Mutual funds allow you to put your money into a professionally managed investment vehicle, which should mean you earn higher returns. In reality, it tends to mean your returns are sapped by constant fees.

Millions of mutual-fund investors sleep well at night, serene in the belief that superior outcomes result from professional oversight. The conventional wisdom ends up hopelessly unwise, as evidence shows an overwhelming rate of failure by mutual funds to deliver on promises.
— David Swensen

Swensen is a powerful critic of traditional mutual funds. But as he also pointed out, there are two major organizations that are almost alone in offering low-fee options: Vanguard and TIAA-CREF. Because they are non-profits, they can keep their fees low. You savings can grow more quickly since a smaller share of your profits are siphoned off into the fund manager's pocket.

You may have a good reason to invest in mutual funds. If you do, Swensen suggests being careful about the expenses. The average expense ratio for small mutual funds is 1.61%. If you invest with Vanguard, on the other hand, your expenses can be 77% lower than the industry average.

For more on the impact that fees have on investing, see our recent post, Magda Wierzycka on the Fees That Eat Your Future.

To read more from David Swensen, get his book, Unconventional Success: A Fundamental Approach to Personal Investment. It gives investors specific advice on how to protect and grow their savings.

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