Market Funds and Trust-Investment Law II

In an article published last year in this journal, we invited attention to the legal implications of the rise of the market-fund concept. This concept-a radical departure from conventional investment ideasteaches that institutional investors who try to beat the market by buying stocks they believe to be undervalued and selling those they believe to be overvalued are likely to do worse in the long run than investors who adopt the passive strategy of buying and holding a portfolio of stocks designed to approximate the stock market as a whole. We argued that the decision of a trustee to invest trust assets in a mutual fund or equivalent vehicle employing the passive strategy-a market fund -raised only superficial problems of conformity with the law governing investments by trustees, that market matching was the superior strategy for a trustee to adopt, and that the courts would come around to this view. Our article created both interest and controversy in the investment community. We were invited to address a number of conferences and seminars sponsored by brokerage houses and other investment institutions, and there we encountered a good deal of hostility -along with a surprising amount of support. The hostility of the investment community to our approach was predictable, since the strategy of buying and holding a market-matching portfolio reduces both brokerage commissions and the role of the security analyst in the investment process. In responding to questions and comments raised by friendly and unfriendly critics, our own ideas concerning market funds and trust-investment law were tested, refined, and on the whole confirmed