Excerpted from Bogle on Mutual Funds by John C. Bogle, pages 53
The second principle of mutual fund investing is professional management. Managing an investment portfolio entails selecting and supervising the fund's holdings. The investment professionals who manage the fund must do so strictly in accordance with the fund's basic investment objectives and policies. For instance, if you invest in a particular balanced fund, you may be promised that a highly diversified list of blue chip stocks will comprise 60% to 70% of total net assets and a diversified list of high-grade bonds will comprise the remainder. The professional manager has an obligation to meet these standards under all circumstances.
Managers must also endeavor to add value over and above the returns generally provided in the financial markets in which they work, a challenging task. On the one hand, it might seem the supreme irony that, on average, the records of professional portfolio managers of mutual funds are undistinguished when compared to unmanaged averages of the returns achieved in the broad financial markets. On the other hand, since it is impossible for all managers as a group to add value in the aggregate, it is not at all surprising that the performance records of many professional investment advisers leave much to be desired. To say the least, the market is a tough bogey.
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