Snowballing scandals in the $7 trillion mutual fund industry are prompting disgusted investors to dump funds.
While defections haven’t made much of a dent in overall fund holdings, investors are transferring millions of dollars in assets to fund firms that haven’t been tainted by scandal. Some are also shifting to alternative investments such as individual stocks. And others are having funds dumped for them as retirement plans, financial advisers and college 529 savings plans ditch tainted funds.
After years of corporate corruption, brokerage scams and accounting shenanigans, the mutual fund trading scandals have been especially hard felt. Mutual funds, after all, have long been advocated as one of the best investment choices for small investors for their diversification and management expertise. But investors are getting a fresh lesson from Wall Street: mutual funds can siphon off money just as easily as CEOs.
How investors are reacting
Susie Cooke pulled out of Janus funds and plans to dump her other mutual funds except those in her retirement plan. “I prefer to buy and sell stocks where the commissions are out in the open,” says Cooke, who teaches computer science at Hillsborough Community College in Tampa.
Ted Cartwright wants the fund industry wrongdoers to go to jail and their assets seized. “I know that several executives and others are losing their jobs, but this is not enough,” says Cartwright, of Centerville, Va., who works in government relations.
Cartwright says that when he moved his wife’s Roth IRA out of Janus funds, he called and wrote the company to say “that I would not be back ever.”
Robert Tanner, a retiree from Portland, says he switched to individual stocks a while ago because he doesn’t like fund fees. Now, in light of what’s going on, he says: “I would never trust my money to a fund manager again. There are just too many opportunities for the industry participants to enrich themselves.”
New York Attorney General Eliot Spitzer has accused Janus Capital, Strong Financial and the mutual fund arms of Bank of America and Bank One of allowing select customers to move rapidly in and out of their funds, even though the funds officially frown on the practice, called market timing. The companies have vowed to cooperate in the investigation, and to repay investors.
Spitzer also accused Bank of America of letting a hedge fund illegally buy its Nations funds after 4 p.m. ET, but get the fund’s share price for that day called late trading. One former Bank of America trader has been charged with larceny and securities fraud. The bank has promised to repay investors. The scandal has since expanded at a dizzying pace. At Putnam Investments, top managers are accused of timing their own funds. Spitzer has said he is pursuing a possible criminal indictment against Strong founder Richard Strong for the same thing.
Putnam’s CEO has stepped down, and the firm has reached a settlement with the Securities and Exchange Commission though civil fraud charges are still pending in Massachusetts.
Strong has stepped down as chairman of the board. Alliance has sacked its vice chairman. The co-founders of Pilgrim Baxter & Associates, the investment adviser for the PBHG Funds, were ousted.
Brokerage giant Charles Schwab may be next. Schwab said Friday that it is reviewing improper late trading in mutual funds overseen by the company and market timing at its U.S. Trust subsidiary. Two U.S. Trust employees were fired for attempting to destroy records related to the market timing.
As vocal as some investors are about the scandal, financial planners say that most clients have been quiet. “It does not seem to bother clients as much as it bothers me,” says Denver financial planner Judy Shine. One possible reason: The long list of corporate scandals the past few years. “I think they’re shell-shocked,” Shine says.
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