- The Washington Times - Wednesday, November 12, 2003

As if finding a safe investment wasn’t tricky enough, the widening mutual fund investigation has made it even harder for investors to figure out where to put their money.

Market watchers predict some investors will start limiting their search to firms untarnished by the scandal. Managers of large pension and retirement plans are already steering clear of the troubled firms.

There are a number of companies that continue to look good, said Russel Kinnel, director of fund analysis at Morningstar, a fund and stock research firm. Among those considered more shareholder-friendly are Capital Research & Management’s American Funds, Vanguard Group, T. Rowe Price Group Inc. and Fidelity Investments.

“That’s not to say they’re perfect by any means, but their priorities are right, their compliance is good and they think for the long term,” Mr. Kinnel said. “It’s not that these are firms run by saints, but they haven’t lost sight of their fiduciary duties.”

Federal and state regulators are examining trading practices at a number of fund firms, where they say the needs of individual customers were sacrificed so a few large investors could make short-term profits. The case has focused on after-hours trading, which is against federal law, and market-timing, which is not illegal but is widely prohibited because it dilutes the returns of long-term investors.

Morningstar has recommended that investors consider selling funds from five firms implicated in the scandal — Bank of America’s Nations Funds, Bank One Corp., Janus Capital Group, Strong Capital Management Inc. and Fred Alger & Co — because their problems are serious enough that the risks outweigh any potential rewards.

It recommends limiting investments in Putnam Investments and AllianceBernstein from Alliance Capital, also named in the case, because the firms have serious issues to tackle both in terms of ethics and t management.

Wall Street is noticing which firms are staying out of the headlines. In a research note last week, financial analyst Guy Moszkowski of Merrill Lynch & Co. upgraded T. Rowe Price from a “neutral” to a “buy,” saying the firm offers above-average growth at a reasonable price and seems well-positioned against peers troubled by regulatory problems.

What is clear is that investors remain heartily enthusiastic about mutual funds. They poured $24.5 billion into stock mutual funds in October, their largest commitment of cash since March 2002, according AMG Data Services.

Half of that went to the three largest fund companies — American, Vanguard and Fidelity. In contrast, troubled Putnam lost $4 billion, in October. Janus lost $1.6 billion, though that was down from the company’s $2.5 billion loss in September.

“Overall, investors are coming back into the market” said AMG President Robert Adler. “So the net overall effect of the regulatory probe is negligible. It appears to be focused on those groups that are charged with wrongdoing.”

The funds apparently winning business away from companies facing regulatory action can’t accurately track it, although customer representatives at T. Rowe Price say it’s happening, said spokesman Steve Norwitz.

“Normally, putting customers first should not be a competitive advantage, but unfortunately it’s becoming one in this environment,” Mr. Norwitz said. “It’s not a bad position to be in … but ultimately, what’s bad for the industry is bad for us. If investors lose confidence in mutual funds, it’s going to hurt everybody.”

Even firms with outstanding reputations can be sullied by the actions of a rogue employee, but investors can do research to determine which ones have the best track records of discouraging bad behavior.

If you are thinking of offloading a fund implicated in the scandal, it’s important to examine commission costs and your tax situation to make sure it’s worth it to sell. But the most important question, as always, is whether you trust the company that’s managing your investment, said Morningstar’s Mr. Kinnel.


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