Ease Your Mutual Fund Scandal Concerns

The impact of investigations regarding impropertrading practices at several mutualfund companies is spreading, and a dominoeffect has begun.

New York Time

According to a s report, last year'smutual fund scandal has raised a few red flags where529 plans are concerned. That's because several fundcompanies implicated by regulators are nationwideproviders of these savings programs. The two practicesat issue are late trading, which is illegal, and markettiming, which is legal but tends to hurt long-terminvestors' portfolios.

Three of the companies under investigation—Alliance Capital Management, Putnam Investments,and Strong Capital Management—manage more than25% of all investments in 529 plans. Specifically, theAlliance Capital Management 529 plan includes theAlliance Bernstein Technology fund. Putnam Investment'sCollege Advantage plan includes two PutnamInternational funds. Three blended college savings portfoliosfrom Strong Capital Management use its StrongGrowth fund. All of these funds have been implicated inthe fund scandals.

Times

The repercussions are already being felt. Accordingto the article, the state of Oregon fired StrongCapital, a manager of its college savings program. Otherstates, while not moving as quickly, are certainly monitoringthe situation. However, some states have longtermcontracts with their money managers, making itdifficult to end the relationship even if they wanted to.

Financial professionals are divided on the issue. TomDavison, a financial planner and partner at SummitFinancial Strategies, worries that the scandal could giveinvestors another reason to turn away from the collegesavings process. However, Joseph Hurley, chief executiveof SavingForCollege.com and the guru of 529plans, cautions against acting hastily. He insists thatwhen all is said and done, the potential impact to thebottom line will be small. To further ease concerns, hepoints out that companies are offering restitution.

Finding Honest Companies

Wall Street Journal,

With these shadows of doubt cast over the mutualfund industry, how can individuals know whethertheir fund company truly cares about its long-termfund investors? Writing for the Jonathan Clements offers some suggestions.

For starters, steer clear of funds that advertise largeshort-term gains. Such ads encourage performancechasers to throw money into the fund, thereby disruptingthe fund's portfolio and hurting results for long-terminvestors. Instead, look for fund companies that workto keep traders out by charging redemption fees. Some,like the Vanguard Tax-Managed Growth and Incomefund, charge a redemption fee on sales within the first 5years. These fees accrue to the benefit of other investors.

Clements also advises physician-investors to askquestions of fund representatives. For example, hasthe company ever closed a fund that has grown tooquickly for new investors? If it has, it's a good signthat the company is fairly ethical and acting in thebest interests of its shareholders.

Clements also notes that a fund company is lesslikely to accommodate traders if its own employeeshave substantial sums of money invested in the company'sfunds. You can research this informationthrough a company's fund prospectus.

Time

An article in also offers some suggestions.Look for fund companies that offer fair-value pricing,where fund prices are reset as news dictates. Also considerexchange-traded funds, which are continuouslypriced and trade like stocks.

Time

The article echoes Clements' thoughts, recommendingthat investors stick to funds that haveshareholder-friendly cultures highlighted by lowexpenses, a record of closing popular funds to newinvestors, restraint in offering new funds for everyfad, and managers who have their own money investedin the fund.

There are also some red flags you should investigatewhen monitoring a current or potential fund.Look out for the following danger signs:

• Management change of actively managed funds
• Merger into another fund
• Shift in investment strategies or objectives
• New or higher fees
• Sustained rise in the turnover rate
• Continued poor performance vs a comparable market index

The key lesson to learn in the mutual fund scandal,Clements writes, is that when you purchase a fund, itsperformance doesn't depend solely on the financialmarkets. Many times, its performance will be dependenton the behavior of your fellow fund investors.Often, the best funds to own are those that are theleast anxious to take your money, and the most troublesometo buy and sell.