We think the markets are expensive, which doesn't mean they can't go still further, but we don't think they have the amount of steam left in them that they had during the last five years.

George U. Sauter, managing director of the Vanguard Core Management group, recently sat down with the indexfunds.com staff to discuss a number of topics - the current performance of Janus Funds, the placement of record cash inflows into the market, competitive low cost ratios for exchange-traded funds, the worrisome trend toward short-term investing, and the market's general outlook.

IF.com: Are the recent disappointing returns of the Janus Funds a harbinger of things to come?

GUS: Regarding Janus, I would say there is some competition out there insofar as earnings growth is more difficult because asset growth has been somewhat muted. Janus, of course, has been pulling the lion's share of assets this year. So you would expect that if anybody would be doing well on a year-over-year basis, it would be Janus.

IF.com: It seems when other investors hear Janus is buying a stock, they jump into it, too.

GUS: That works for a while. It used to be called the "Peter Lynch effect." He created such a big fund that by the time he was done buying a stock he himself had driven the price up. That kind of momentum can last for a period of time. But there are other periods of time when that type of investing does very poorly. Janus has been riding a very strong wave.

IF.com: With the enormous cash inflows during this time of high evaluations, is there any difficulty placing this money?

GUS: No. No more difficult than any other period in time. In fact, mutual funds have relatively low levels of cash right now - lower than they would on average historically. I think that's because it has been such a handicap to have had cash over the last five years that a lot of mutual funds managers have really focused in on benchmarks. They're trying to remain fully invested to make sure they're performing in line with those benchmarks.

Cash has been a killer over the last five years. It's the fear that the market may take off again. You definitely don't want get burned in that event. Certainly holding cash over the last six months would not have hurt you, but you didn't know six months ago that the market was going to be flat.

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