The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust And What To Do About It

Lowenstein, a Columbia law professor and former corporate executive, argues that the American mutual fund industry is organised against the interests of the people whose money it manages. The conflict is structural: fund management companies are separate businesses that profit from assets gathered, so their incentive is to market aggressively and to launch whatever product sells, while shareholders need low costs and durable strategies.

His evidence is empirical and specific. He examines the largest funds by assets and shows high expense ratios, high portfolio turnover, closet indexing and returns that lag both the index and the funds' own reported time-weighted figures once investor cash flows are accounted for. He contrasts these with a group of ten low-turnover value funds, several of them closed to new money, that beat the market over long periods while charging less and trading rarely. He also dissects the 2003 market-timing and late-trading scandals, arguing that independent directors approved arrangements that plainly harmed shareholders and that regulatory response was weak.

The policy argument follows from the diagnosis. Lowenstein wants meaningful independent boards, real disclosure of costs and turnover, and a legal standard that treats fund advisers as fiduciaries rather than as vendors.

The book predates the full rise of index funds and exchange-traded funds, which delivered much of what Lowenstein wanted through competition rather than regulation. His sample of successful value funds is small and chosen with hindsight, and several of the managers he praised later underperformed.