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GEOFF COLVIN: With the new model year underway, it’s time to ask what’s new and exciting, not just about cars but also about fun and intriguing gadgets inside the cars, like these things. These are digital satellite radios, one from XM, one from Sirius, the two big competitors in that business. Who’s got good news, who’s got bad news, and what should a smart investor make of it all?

Gary Lapidus is one of America’s top-rated auto industry analysts. He joins us from Goldman Sachs in New York. Mike Jackson is CEO of AutoNation, which owns hundreds of car dealerships around the country and is the largest auto retailer in the world. And John Rettie is a consultant and writer who’s been following the auto industry for more than 30 years. He joins us from Los Angeles.

John, let’s start with what’s cool. What is new and exciting inside the cars now?

JOHN RETTIE: Inside the cars. Well, there’s navigational systems. I happened to drive down here today in a Chrysler Pacifica, and I was very pleased to see the GPS navigational system is right in the dashboard in the speedometer. So as you’re looking at the speedometer, you’re seeing a map of where you’re going.

COLVIN: What else? What about entertainment systems and things like that?

RETTIE: DVDs, DVD players for the kids. The back seat of the Pacifica again and minivans. That’s the hot item.

MIKE JACKSON: Geoff, just to give you a little perspective of a retailer, we love all the new technology that’s coming into the cars. But what we’re talking about with the manufacturers is the complexity issue.

COLVIN: This is something I wondered about. Can it get to be too much?

JACKSON: It has been too much in certain vehicles. And we’re saying to manufacturers, these are wonderful ideas, wonderful technology, but if you can’t design it in a way that the consumer can interact with it in an intelligent way, please don’t put it in the vehicle. Sometimes there’s nothing wrong with an old fashioned round knob to adjust something.

COLVIN: Yeah, as a consumer I can certainly agree with that.

LAPIDUS: And the challenge for the manufacturers, and certainly the interest on Wall Street, is can you get consumers to really pay for a lot of the technology and the gadgets that are going into the vehicles?

COLVIN: Right.

LAPIDUS:And based on the profitability that we’ve seen out of some of these manufacturers, the answer would seem to be, "Not necessarily."

COLVIN: Well, now this raises a very interesting question, Gary. Right now what would you rather be? An automaker or an auto buyer?

LAPIDUS: Well, I’d certainly rather be an auto -- better to be selling automobiles, or excuse me, buying automobiles right now as a consumer, than in most cases, to be selling them. That’s of course, that’s a general statement. There are some manufacturers that are doing very well, but certainly if the benchmark is the Big Three or a Big Three customer, I’d rather be the customer.

COLVIN: Well, let me ask you a very big picture question then. Are the Big Three, the big U.S. automakers in long-term decline?

LAPIDUS: Well, our view has been and continues to be, the answer is yes, but that’s as a collective group. It’s conceivable that one or two of them would prosper at the expense of the others. They’re not going to go away. We fully expect that the majority of these brands and the majority of the capacity will be here in the future. But the ownership structure over time may evolve.

COLVIN: Well, they’re having problems, but I gather you think that the companies that supply them, that sell the things to the auto manufacturers, are actually looking pretty good. Is that right and, if so, why?

LAPIDUS: That’s right. We actually think the supplier business model is a much better model right now than the manufacturer business, largely because the supply-driven deflation that we’re seeing in the automobile business is just leading to more and more volume, record amounts of discounting, price reductions, content increases. So it’s great for the consumer, and they’re snapping up vehicles. It’s also frankly great for retailers as well. I mean, certainly Mike’s business benefits from this because we’re just moving lots of vehicles and creating lots of servicing opportunity for new vehicles on the road. And if you’re a supplier making, you know, interesting products with good defensible technology or if you can get the costs and productivity into your supply chain to maintain your margins, that can be a very good business right now.

COLVIN: It can. Well, Mike, what’s your view on that? Because I think it may be different.

JACKSON: Well, I think to be a seller, namely the retailer, it’s a great time to be in the business.

COLVIN: Right.

JACKSON: Our business model is very different. We have low fixed cost, a very diversified revenue stream with share opportunities, great positive cash flow, and barriers to entry. So when you think automotive, you really have to put it in several different categories, OEM, supplier and retailer, and don’t forget as a retailer, the OEMs want to sell to us.

COLVIN: The OEMs are the original equipment manufacturers.

JACKSON: The original equipment manufacturers are looking to sell to us. There are different business models, so retailers are doing just fine.

COLVIN: Well, let’s talk for a second, Gary, about some of these suppliers and who specifically you’re talking about.

LAPIDUS: I concur with Mike’s view. You really can’t paint the whole industry with the same brush, anymore than you could paint all the OEMs with one brush, because they are very different. Specifically the suppliers we like, Lear ...

COLVIN: What do they do?

LAPIDUS: Lear basically does anything that’s in the interior of the vehicle, seats, door panels, instrument panels, overhead systems. And then maybe perhaps most important, they do all of the integration of a lot of these new gadgets and gizmos that we were talking about. So while Lear doesn’t manufacture DVD systems, they’re the ones that integrate it into the electrical architecture of the interior and integrate it into the interior modules. For example, if it’s up in the roof, the overhead system, Lear’s the one who integrates that in.

COLVIN: Who else?

LAPIDUS: Johnson Controls is another one that we like. And lastly, a slightly different business model, Magna International, which is a Canadian company we also like. Those are the three stocks that we’re recommending and have been recommending for quite awhile.

COLVIN: Johnson Controls I know also makes seats and some other interiors. What about Magna?

LAPIDUS: Similar to Lear, and Magna is also in the interior business. They’re a big more diversified, however. They do a lot of structural products, frames for trucks and sport utility vehicles. And Magna actually does niche vehicle manufacturing. For example, they are just launching now BMW’s new X3 sport utility vehicle, and they’re actually building the vehicle in Graz, Austria, which of course is a town that’s been in the news recently.

COLVIN: It has indeed.

LAPIDUS: Because of the hometown hero. But Magna...

COLVIN: For anyone who doesn’t know, that’s where Arnold Schwarzenegger was born. Sorry, go ahead.

LAPIDUS: That’s correct. But you know Magna is a highly diversified business, which gives it, they’ve got a tremendous business backlog. And so we see that as a great growth story as the auto companies continue to outsource more of what they do to the suppliers in an attempt to try and get their costs under control.

COLVIN: Get the costs under control. John, I think you have come across a particular technology that I found fascinating as the father of a teenager. What was it?

RETTIE: It’s this little thing called a CarChip that plugs into the OBDII port in any current car, and it keeps track -- it’s like a black box -- it keeps track of the speed, braking, distance, time of the vehicle. It really accesses all the information a technician can access. Now it’s available in this little item which is only about $250 from Davis Instruments. And, yes, right, I have a teenage son, and it’s great to be able to keep track of where he’s been and how fast he’s been driving.

COLVIN: That’s a revolutionary concept. When you look at the car industry and the car models, what models this year are looking either particularly cool or particularly successful?

RETTIE: Well, yes, I’m on the jury for the North American Car of the Year, and we’re going to vote on that in December. And there aren’t really any vehicles that are popping up to the top yet, but I think we should look at the Cadillac XLR. In fact Cadillac is doing quite well, which proves that you can turn around a brand fairly well. They’ve done well in the sport utility vehicles and now their cars are doing well, the XLR. Then the Chrysler Crossfire is interesting. Then you’ve got two aluminum-bodied cars, the Jaguar XJ8 and the Audi A8L. And then we mustn’t forget Volkswagen with the Phateon, which is their luxury car which goes on the market in December in this country.

COLVIN: A luxury Volkswagen is a concept a lot of people are going to have trouble with. Is it going to be okay?

RETTIE: That’s open to debate. I think it’s rather like Lexus when they came out in 1989. If they price it right, they might be okay. If they price it, you know, right head on with Mercedes or BMW, I don’t think anybody will buy them. But if it is less costly, certainly they should get some smart buyers looking at it. And then the Volkswagen Touareg, their new sport utility vehicle, is doing quite well, and that’s excellent off road.

COLVIN: Despite the difficulty in saying its name.

RETTIE: That’s true.

JACKSON: If I may add, as a retailer who is looking in the face of consumers every day, I have never seen the consumer more excited about the product, and I’ve never seen the manufacturers more aggressive with their product programs. Just in the last five years, we’ve gone from 1,000 different models to 1,400 different models. And the consumer, of course the incentives are out there, but they’re not going to spend $28,000 unless they’re excited about the product itself.

COLVIN: Well, and it does seem to be a great time for a consumer to be buying a car. But now you’re the biggest retailer in the world, what are the best deals right now? If you were advising a consumer, if you were advising a close relative about what kind of car to buy for a good deal, what would you say?

JACKSON: Well, that’s what we do as a retailer. The consumer has these unbelievable choices, 1,400 different models, with incentives that are mind-boggling to keep track of. You need a Ph.D in incentives. And what we do every day for 2,000 units a day is sit down with consumers and say, what are your needs, what are you looking for, and we’ll help you get there, and we’ll also find the right financial incentive package. Now I have to tell you, in doing that it’s not a completely logical business. That’s one of the things that’s exciting about it. And we’ll have the same consumer that’s swinging between a Mini and a Navigator. So there’s no logic there, but with enough conversation you can find the right product and help the consumer get the right product with the right incentive package.

COLVIN: One of the realities of ... go ahead, go ahead.

LAPIDUS: I was going to say, Mike may not like my advice for the consumer, but my advice for the consumer generally has been wait, because while the car companies do a very good job trying to make the consumer think that these deals are going away, you know, they never do. They only get better. You know, keep America rolling, which was the original zero-percent offer right after Sept. 11, it was a zero-percent, 3-year offer, and we’re now seeing zero-percent, 6-year offers on certain models. And actually our view is that we probably will continue to see better deals as we get out into 2004.

COLVIN: We’re short on time, but I want to ask each one of you briefly, what do you drive? Gary, then John, then Mike.

LAPIDUS: Well, people don’t ask me, “Have you driven a Ford lately.” They ask me, “Have you ridden in a Ford lately?” Because I actually, living in New York City, I don’t own a car, and I ride in yellow Ford taxicabs.

COLVIN: Exactly. John?

RETTIE: Oh, I’m lucky. I don’t own a car either. I live in California, but I’m very fortunate. I get to drive a different car every week. I have to evaluate them, so it’s a Chrysler Pacifica this week. It will be a Cadillac XLR in two week’s time, and then a Ford F-Series pickup truck.

COLVIN: Mike, so far two auto industry experts who admit they don’t own a car. What about you?

JACKSON: I own a lot of cars, to tell you the truth. And I have to admit, though, I started in the business as a Mercedes mechanic, and I, at one time, was the CEO of Mercedes-Benz. So at the end of the day, the car that I’m driving is a Mercedes-Benz.

COLVIN: We’re out of time, Gary, but do you have some disclosures?

LAPIDUS: I believe the disclosures would have been up on the screen, but if they weren’t, essentially I don’t own any of the stocks that I’ve talked about. Our company, Goldman Sachs, would have some investment banking relationships with some of the names I’ve talked about, but we don’t own any of the stocks.

COLVIN: Okay. Gary, John, Mike, thank you so much.

Greenberg interview

KAREN GIBBS: It's that time of the year, the leaves are turning, there's a nip in the air, and I’m going to have to roll up my sleeve and get a flu shot. If you’re one of the millions who can't decide which is worse, risking the flu or getting stuck with a needle, here's medical technology to the rescue: a nasal flu spray. Maybe you’ve seen the commercials:

(commercial begins)

Boy: Oh, where's mommy?

Dad: She's sick in bed. Come on. We've got to get you ready.

Announcer: Who would replace you if you got the flu? Before you get the flu, ask about new FluMist. The first nasal flu vaccine for healthy adults and children ages five to 49. In studies, runny nose was the most common side effect. Others included headache, cough and irritability. Ask tour health care professional about new FluMist, before the flu hits you.

(commercial ends)

GIBBS: MedImmune, the company behind this spray, hopes its stock will become a hit with Wall Street. We, of course, want a second opinion, so we’ve asked Berb Greenberg from TheStreet.com for his prognosis. Herb, how are you doing?

HERB GREENBERG: Karen, I’m doing just fine.

GIBBS: Well, what's at stake here for MedImmune?

GREENBERG: Well, I think for MedImmune, $1 billion worth of sales, and to keep it in perspective, let's first say several things. First, MedImmune's a good company. Last year they did about $847 million in sales. The bulls say, and the fans of this company say, that if FluMist is a big success, within the next several years it will add $1 billion of sales to this company.

GIBBS: But who's the target customer?

GREENBERG: Target customer is anyone between the ages of 5 and 49. And you know what that means, Karen?

GIBBS: What?

GREENBERG: It means I can't get it. I can't use it. In fact, it means almost everybody who has traditionally been told they should get a flu shot cannot get this. In fact, even if you have asthma, this is not for you. You still have to roll up your sleeve. So that is going to be the real test of this drug.

I’ll tell you something. My son's 14-years-old. He doesn't like shots. And I said, "Now, let me ask you something, if you can get a shot to keep you away from getting the common cold, would you get one?" He said, "Absolutely." But you see, the cold is something everybody gets, and the real issue here is, are healthy people going to decide they have to go and get some mist, you know, thrown up their nose?

GIBBS: How about the cost of this FluMist?

GREENBERG: The cost is another issue. It’s a real risk that somebody has to consider. The cost of this on the retail level is anywhere, sat from $60 to $80. My doctor said he'd have to charge over $80, and my doctor is one of many doctors who doesn't use it. He's not going to offer it to his customers this year. Most are not going to offer it this year. They’re going to wait and see. That compares with, say, $10, $20, maybe $30, depending on your doctor, for a flu shot. And the other key point is that this is not necessarily something that is covered by insurance. Some insurers are covering it, some are not.

GIBBS: Well, what about the expectations of sales this year?

GREENBERG: Sales this year are expected to be around $150 million thereabouts. The company has said they expected to ship anywhere between 4 million doses and 6 million doses. But at the most recent conference call last quarter, they were saying it would be closer to 4 million. So the real issue is, you know, people say this year they’ll probably sell out what they have. But you know, you can also return this stuff. The people who buy it, the drug stores, you know, Wal-Mart, for instance, is going to be offering this. They can return this, and the company is actually reserved for 15 percent returns. So, if it doesn't do as well as expected, that could be something that could hit the stock.

GIBBS: Yeah, talk about that because MedImmune right now is trading somewhere between $34 a share, $35 a share. Suppose FluMist is a bust?

GREENBERG: If it's a bust, I checked with one guy, who often shorts stocks, who likes this company a little bit. His worst-case scenario is about $30, because remember, MedImmune has other products that are doing alright, and one, in fact, that has some growth associated with it. The best-case scenario, some people think, you know, maybe $40, maybe above $40. So you have to think about what tour risk/reward at this point.

GIBBS: And how about the competition? I’m sure they’re chomping at the bit.

GREENBERG: Well, there is a competitor, but you have to be careful with this one, and it's one of those that, you know, that's been riding the coattails of MedImmune. This is a company out of Vancouver, in Canada. It is called ID Biomedical. The company really doesn't have much in the way of sales. Has nothing in the way of profits. Does not have the kind of, you know, products this company has. Its product won't be in clinical trials until November of this year -- in phase three of clinical trials. As we all know, phase three, anything can happen, and that's when a drug that seems so promising can actually get nixed.

But, the big difference between ID Biomedical's product and FluMist is, ID Biomedical's uses a dead flu virus. The FluMist from MedImmune uses a live flu virus. So then you have to say to yourself, do you want something live -- which can actually give you the flu, or make you really feel like you have the flu -- put up your nose?

GIBBS: Yeah, that would make me question it too. Well, let me ask you this, it does sound like a promising development, how can investors take advantage of new, interesting biotech developments?

GREENBERG: The way I would suggest -- and again, I’m a reporter, not an advisor. I want to make that very clear -- but as I’ve done for myself, and I wrote about this in FORTUNE a while back, is through a biotechnology mutual fund. And when you look at biotech funds, you know, 12 years ago there were tons of them. Right now there aren't many. And many of them are what I like to call watered-down funds that have pharmaceutical companies inside of them. But there are actually several out there that are pure biotech, and I went for the most speculative I could go for, you know, because they only have biotechnology, because I believe if you have a long time horizon, 10 or 15 years, there are going to be cures for cancer, or cures for things that are going to cause the whole group to go up.

Well, I bought into one of these three funds that I looked at. I was trying to find one that had the best manager, so I bought into the PIMCO RCM Biotechnology D-shares fund. That was back in December. I thought it would take me 10 years to get a return, (but) it rose 30 percent, I took out my profit. I left the rest in, I expect to buy more when this whole biotech boom busts. And I’m sure there will be another bust, as there will be another boom.

GIBBS: Well, how about that? The sector's up over like 30 percent this year, and it is very, very volatile. Is it something for the individual investor to even think about?

GREENBERG: Well, I think they can think about it in terms of the risk component of their portfolio. But I have to tell you something. I think there's more future to biotechnology then there is actual high technology in terms of future potential, because remember, as we go forward there are more products that have been worked on that are in the pipeline that will see some results. Of course, you know, there's always a lot of hope around these things and sometimes the markets aren't as large as people expect. And that's just what we're going to find out with FluMist.

GIBBS: What are some of the other funds that you sat could be a pure biotech play?

GREENBERG: Pure biotech funds, when I did my research, were the Fidelity Select Biotech Fund and the Franklin Biotechnology Fund. Those were three -- when I really looked through all of Morningstar, those were the three I came up with. I have to tell you, that was back last November. There could be others there. And, again, if you’re a little more risk averse, you start looking through the portfolio of these funds and you look for funds that have companies like Eli Lilly and Pfizer. They’re added to the component of these funds. But again, I want the ones that only have Amgen, Genentech, and everything else that is considered biotechnology.

GIBBS: And how about the demographic play, Herb? I’m a baby boomer and I’ve got more aches and pains then I can make a list of. Is that going to play into the progress of biotechnology?

GREENBERG: That's why I think biotechnology is this decades great investment because -- you know, even if you look at guys like Larry Ellison and the people who made a lot of money in the tech boom, where were they putting their money? They were putting their money in -- these multicajillionares, look at even Michael Milken, where he's putting his money, it's all going into medical research, it's going into biotechnology. I think a lot of these people feel, "Hey, you know, I want to live longer. I want to look good. I want to feel good." So, you know, they’re putting their money where their mouth is.

GIBBS: Herb, always a pleasure. Thanks for joining us.

GREENBERG: It's always a pleasure too.

Gensler interview

INTERVIEWER: Morningstar has just come out with a study that says, surprise, surprise of all things, past performance is no guarantee of future results. How do you read this study?

GARY GENSLER: Well, this is a wonderful study for a number of reasons. One, it's done by a leader in research on mutual funds called Morningstar. And two, it updates other studies that have been done in the past. They looked at the last ten years and said does past performance, if a mutual fund does well, how will that predict the future? And what they found is even if a fund was in the top quartile, meaning it was the top 25% in performance and there were three-fourths that were below it in one year, the next year that really didn't predict it to be in the top quartile again. About 30% of those funds were in the top quartile the next year. So you fully had 7 out of 10 chances that you fell out of the top, so to speak. And when they looked at all sorts of different combinations and permeations, the last three years, the last five years, they kept finding the same clue, that past performance did not predict the future. And so it's really a wonderful study and a little bit of a wake up for us all to remember what the markets are about.

INTERVIEWER: It's not a surprise to you, because you've studied and written quite extensively on this, but most people are trained to rely on past performance. Why is that misleading?

GENSLER: Well, I think it's human nature to rely on experts, rely on past performance. If a restaurant was good last week, we think it will be good this week. And we certainly like to go to a doctor that has steady hands and has done good surgery if we're going to have surgery. The markets are a little bit different. It's very hard to pick out-performers. And so with mutual funds, studies have shown for about 40 years now this same conclusion. And beware of the advertisements that try to lull us into picking the hot fund of yesteryear that won't be the best fund next year.

INTERVIEWER: Why are mutual funds different than restaurants, than my kid's report card and everything else that we're trained to chase or expect?

GENSLER: Well, it's a very good question you ask. And the reason is, is because mutual funds, all of these mutual funds together, are the market. So if we take all of these mutual funds together, they can only do as well as the market. Now what about the ones that do best? They're a little bit like you and I trying to bet on football on the weekend, if you'll excuse the analogy. But when we bet on football, if we go to a bookie and get one of those little cards, it has a point spread. Well, the market already has a point spread built into it, and it's very hard to beat the point spread consistently week after week. And remember, these mutual funds are not picking one stock or two stocks. They usually have about 100 or 150 stocks in any one mutual fund. That's a hard task to do, even for the best mutual fund manager.

INTERVIEWER: Let’s talk about advertising, because it seems to be, past performance seems to be the bedrock of mutual fund advertising. Explain to me what it is that mutual funds are trying to advertise and want us to think.

GENSLER: Well, first, recall a mutual fund company is in business for their shareholders, not for you and me, the investors. So they have shareholders of their own that they’re trying to get the best performance for. For instance, in this latest scandal with Bank America, Bank America wants the bank to do well. Their Nations funds may be not as important. So they advertise to get you lulled into thinking that past performance will predict the future. And they usually say, “Look at this. We had the best performance last year.” And they might even have a picture of a couple looking very secure, thinking about their retirement, and making you comfortable to invest with them.

INTERVIEWER: If I’m not using past performance as a guide, what should I look for closely when I’m looking at mutual fund ads in particular?

GENSLER: Well, it’s really back to basics like any good company or investment. You should look at lowest costs. You should really look to diversify across the entire market. If you pick any one sector, next year might be great risk. Last year, 2002, real estate funds did very well. 2003 there’s another story. And we all know what happened to technology stocks. So low cost and diversify, and lastly, hold for the long term. Most advertisements don’t tell you, but the average mutual fund turns over their stock, sells all of their stock in the course of about 15 months and replaces it with other stock. Well, of course that adds a lot of cost and taxes. That’s not very good.

INTERVIEWER: Isn’t it almost expected, or shouldn’t it be expected that the top performing funds this year or in this quarter, whatever period is being measured, aren’t going to continue to be the top performing because investing styles change and momentum goes the other direction? Talk us through that whole process.

GENSLER: Well, you’ve raised a very good point. Sometimes the funds that do well are in a particular sector, or they might be in a particular area. The market generally is, you can think of as value stocks or growth stocks. These are just jargon, but value stocks tend to be higher earnings, lower growth, and then growth is maybe a new style of company. Well, one year value might do well. The next year it might be growth. Sometimes growth might even do well for two or three years in a row. Last year value did particularly well, but that doesn’t mean that next year’s market will be the same. And so you’re sort of chasing after yesterday’s news by buying the hot fund of yesteryear. And it’s interesting, and we looked at it in our book, every time you study this, you find that past performance is not a predictor of the future, and those funds that are advertised usually do worse in the future than they did in the past.

INTERVIEWER: Keep talking about that a little bit. Explain that.

GENSLER: Well, mutual fund companies like to advertise funds to lull you in, to bring you in. And a wonderful study done a year or two ago said that in fact they usually get about 20 percent better cash flows. They bring you, the investor, into the fund 20% more than if they didn’t advertise. Well, that’s logical. Drug companies do the same. But here usually the performance goes off, and what they do is the marketing department pulls the ad in and they change the names of the companies. So every six months you might see a different name of the companies in these advertisements. You might see different names even in the magazines, Smart Money, or even a Consumer Reports that might do their annual review of the hot funds. They do that because they know readers are interested. I don’t fault them. That’s what the readers want to read about. But it’s unfortunately based on a false premise, and that’s why this Morningstar study is so valuable because it reminds us again that the funds that are advertised, funds that are hot one year are not going to be hot the next year as styles in the market change and has...

Past performance is not a good predictor of the future because so many things change in the markets. I mean it could be a 9/11, which is a terrible crisis, or it could just be that technology is over-invested, meaning companies have bought too much technology. Sometimes gold goes up, sometimes real estate goes up. And because of all those ups and downs in the market, it brings you back to basics to buy across the entire market a diversified fund, which then at the end of the day is the market. And you want to look at the lowest cost, which usually means index funds, which means very low cost, low purchasing and selling of the stock, and the highest returns.

INTERVIEWER: Talk to us a little bit about the way bond funds are marketed in particular. They’re usually comparing it to various benchmarks. What should we watch out for when we’re reading a bond ad?

GENSLER: Well, you’ve asked a very good question. Bond funds, which are popular in America because many of us want to have some assured savings when we retire, allow us to invest in bonds. They usually are a bad deal, and the reason for that is their fees of 1 or sometimes 1 ½ % a year, are pretty high in these low interest rate environments. Interest rates today are only 3 or 4%, and so all those fees can eat up most of the return. So what do the mutual fund companies do when they advertise? They say, they beat their chest and they say, “We’re very strong against the other mutual funds.” They might compare themselves to an index of other mutual funds, something like the Lipper index or other indices of other mutual funds, rather than the relevant question that you should look at, is how do they do versus the bond market or how do they do versus owning Treasury bonds? Or if you lived in Maryland, Maryland municipal bonds. And that question usually leads to the answer that these bond mutual funds are not that good a deal.

INTERVIEWER: So when I read an ad that says somebody’s equity income fund was ranked number one out of 19 equity income funds since its inception through a certain period of time by Lipper Inc., the fund targets well established companies paying above average dividends, I read that and I say, wow, ranked number one. Why wouldn’t I want number one? But you’re saying, and I’d like to have you say, it’s not only that, it’s not only that they are ranked number one, which doesn’t talk about future performance, that’s past performance, you’re saying it’s even worse than that.

GENSLER: Well, there’s really two problems with this. One, it’s past performance, which is not predicting future performance, and two, with bond funds they’re not even comparing it to the market itself. And what’s the market? Not the other mutual funds. You’re all in the wrong, you know, sandbox. It’s really what if I just bought some bonds directly. And again, when interest rates are this low, the costs, the ankle weights of running with those costs are too heavy.

INTERVIEWER: I realize you might repeat yourself here, but let me just get you to characterize why bond fund advertising can be so misleading.

GENSLER: Bond funds will advertise against various averages of other mutual funds, other bond funds. That’s misleading because bond mutual funds, all of them tend to underperform. Various studies show that about 80 percent of bond funds, that’s 4 out of 5 bond funds, will do worse than if you just went out and bought the bonds directly. And if you have a fair amount to put in the market, for instance, over $10,000 to put in bonds, you’re really better off buying U.S. Treasuries. You can do it on the telephone or the Internet directly with no cost. Or you can buy municipal bonds from your state very cheaply and do better than all of these bonds funds. As I said again, 4 out of 5 will do worse than the bonds themselves.

INTERVIEWER: You come out of Wall Street and the public sector. If you were working for an advertising firm and you had the opportunity to really do truth in advertising, make up some ads for what mutual fund advertisements should say if they were really going to be truthful and above board.

GENSLER: Well, if I worked in advertising, I think I would probably do a lot of what’s being done, because my job would be to get the most amount of money invested in these mutual funds. But if I was trying to put my public policy hat on, then the ad should tell you that, how much their costs are. Certainly for bond funds, how they perform versus bonds, not versus all of the poor performers. And with regard to stock funds, they should have a big, bold caption like on cigarettes, and say something to the extent “Past performance does not predict the future. Ignore the rest of this ad.” But lo and behold, that’s not what they’re going to say.

INTERVIEWER: What do you think when you hear that phrase, I see, looking through bond funds, I see it’s buried in many of the funds and in many of the ads, that past performance is no guarantee of future results in the very fine print. Should they be required to play that up more? I mean you had a novel idea like for cigarettes.

GENSLER: Well, when I see that, I think of course a good set of lawyers is trying to protect them and it’s good they’re there. Ultimately it is about human nature. All of us want to get a little bit of the ticket to the show, if I can say, a little bit of a feeling like we’re in Las Vegas, but not feel guilty about it. And I think that’s part of the human nature that we invest in stock mutual funds and hope that we’re going to do better than the market. It’s kind of boring just to invest in an index fund, like the Vanguard products and so forth. Fidelity has very good index funds. You don’t want to go to the water cooler and say I’ve got this very interesting, boring index fund, but that in fact is the best news around. And this Morningstar study once again points in that direction.

INTERVIEWER: One last question here, but is it that the ad agencies that write these ads, the mutual fund companies, they know how we’re looking for a little excitement and we don’t want the boring fund, that that’s what they’re trying to do?

GENSLER: The ad agencies really do understand marketing and they understand you and me as investors, that we want a little bit of the excitement. We’re hoping in our investing that we can do better and that we want to trust experts, because in most our life we do trust experts. But in this world, this complex world of stocks, it’s going back to basics and common sense, and common sense tells you that mutual funds, after all their costs, all their trading, all their chasing after the proverbial hot stock, tend to under perform the market and that you’d be better just being kind of boring, even though it’s not fun, in an index fund.

INTERVIEWER: Anything else of note from the study that you think our viewers should know?

GENSLER: I think it’s most interesting that it’s from Morningstar, because Morningstar is a company that actually rates mutual funds. And in most advertisements, you see 4 stars or 5 stars, and those stars are from Morningstar, and here Morningstar is saying, "Beware of our own rankings." Even on the book that I authored, co-authored, Morningstar endorsed the book when one of the main conclusions of the book was ignore all rankings. So I think that’s quite a statement that Morningstar itself -- that’s quite a statement that Morningstar itself has said "Our own rankings, our own 4 and 5 star funds, you should beware of those, because they don’t perform so well in the future."