Fund Industry

As competition in the mutual fund business grows increasingly intense, more players in the industry appear willing to sacrifice integrity in the name of performance. For a $2-trillion business built on public confidence, this trend is disheartening at best and downright dangerous at worst.

Regulators are proposing dramatic reforms to one of the most popular places for retail investors to put their cash: money-market funds. The staff at the Securities and Exchange Commission is drawing up new rules that would govern the $2.7-trillion money-market-fund industry after the ultra-safe reputation of the funds came into question during the financial crisis. Money-market funds have long provided the safety and accessibility of a checking account with slightly higher returns thanks to a strategy of making almost risk-free short-term loans.

In Russ Wiles' "Before Investing, Check Tax Status of Payout" (March 19), he correctly states that "mutual funds don't do a good job of minimizing capital gains payouts to investors." I did find it odd that Twentieth Century's Growth and Select funds were cited as efficiency standouts. According to Morningstar, over the last two years ended December, 1994, these funds distributed cumulative capital gains distributions of $5.99 and $7.34 per share respectively. That's efficiency? Additional points should be made here.

The business of picking one investment over another is great for the person doing the picking, but often less so for whoever hands over the cash. It is rarely the clients of mutual fund companies who own the yachts. Yet the conclusions of "The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True" are still startling, and the author poses a question to the entire hedge fund industry: How can it prosper when customers are treated so badly? For instance, if all the money that has ever been invested in hedge funds had instead been put into U.S. Treasury bills, the results would have been twice as good, according to Simon Lack, author of the book published by Wiley.

Investors pumped more money into long-term mutual funds in May than in April, but some fund giants appeared to continue to suffer fallout from the trading scandals revealed in 2003, new data show. Putnam Investments and Janus Capital Group Inc. had net cash outflows in May, marking the fourth consecutive 12-month period the fund companies had suffered net withdrawals, according to a report from Financial Research Corp. issued Tuesday. Across the fund industry, investors put a net $18.

The mutual fund industry's long honeymoon with the media may be over. At issue is whether the press--and, more important, the public--can continue to trust the industry's ability to vigorously police itself. This is more than an academic question: The $2-trillion fund industry has been built up largely on investors' trust over the last 10 years. The fund business is, arguably, the cleanest $2-trillion business in the nation and perhaps the world.

An unprecedented stream of scandals and controversies this year threatens to halt the mutual fund industry's explosive growth. "There is a tremendous escalation in controversy in the fund industry," said Bob Powell, editor of Mutual Fund Market News in Boston. "It's a recipe for disaster." More than 5,000 funds are now available to investors and the amount of customers' assets under management has doubled, to about $2 trillion, since 1990.

A mutual fund industry organization proposed Monday to sharply limit personal investing by fund managers, a plan prompted by recent complaints that some managers may have feathered their own nests in conflict with the best interests of their funds. But the six-member advisory group of the Washington-based Investment Company Institute stopped short of calling for a total ban on personal investing by fund managers, which a number of the industry's critics have advocated.

Many investors have lowered their opinion of the mutual fund industry in the wake of scandals over market timing and late trading, according to survey findings from an industry group released Wednesday. The survey said 76% of mutual fund investors were aware of the trading scandal, and among these, 56% had a lower opinion of the industry than previously. But 44% said it had no effect on their views.

The mutual fund industry's chief trade group on Thursday proposed new rules to combat trading abuses in fund shares, including a strict deadline for entering buy and sell orders and a 2% fee on rapid traders. But by reducing millions of individual investors' flexibility in their fund transactions, the cure could be worse than the disease, some industry critics warned. The plan put forth by the Washington-based Investment Company Institute comes nearly two months after New York Atty. Gen.

Sebastian Mallaby, a veteran journalist who has worked for the Washington Post and the Economist, came out this summer with what has been described as the definitive study of the hedge fund industry with his book "More Money Than God. " Using his access to some of the most secretive and wealthy investors in the world, Mallaby explored the gilded world of these highfliers and explained why many hedge funds seemed to come out of the financial crisis...

When weighing the results of a medical study it's important to consider who supplied money to conduct the research. According to an analysis of drug trials published Monday, studies were much more likely to be positive -- that is, showing the drug worked -- in trials that were funded by the pharmaceutical industry. Researchers reviewed 546 drug trials and found that industry-funded trials reported positive outcomes 85% of the time compared with 50% of the time for government-funded trials and 72% of the time for trials funded by nonprofits or non-federal organizations.

Mutual funds that charge exorbitant fees can be sued for violating their duty of trust to investors, the Supreme Court ruled Tuesday, rejecting the view that the free market can be counted on to ensure fair fees. But the justices also made it hard for plaintiffs and securities regulators to win such claims and warned judges against "second-guessing" the pay decisions made by an independent board of directors. The mixed result came in one of this term's most closely watched business cases.

As an eavesdropping-detection specialist, Kevin D. Murray normally works for companies concerned about possible spying by competitors. But since a blockbuster insider-trading prosecution built on wiretaps and microphone-wearing informants became public last month, frantic hedge fund managers have raced to hire him. "The nature of the question is 'Can you tell me if the government's bugging me?' " Murray said, adding that he turned down the three firms that approached him. Two years ago, hedge fund managers were acclaimed as financial whizzes, envied and even grudgingly respected for raking in gobs of money with daredevil investment strategies.

An investigator at the Securities and Exchange Commission warned superiors as far back as 2004 about irregularities at Bernard L. Madoff's financial management firm, but she was told to focus on an unrelated matter, according to agency documents and sources familiar with the investigation.

Hard times for the mutual fund industry will mean more layoffs at Los Angeles-based titan American Funds, and no merit pay increases this year for remaining employees, the company confirmed Tuesday. It's another sign of the drastic shrinkage of the financial services industry as the stock market has suffered its biggest dive since the 1930s: Layoffs and pay freezes had been virtually unheard-of at American Funds in its 80-year history. The privately held firm -- the second-largest U.S. manager of stock and bond mutual funds, with about $700 billion in assets -- has a reputation for being benevolent to its workers.

The fast-growing hedge fund industry has boosted financial markets by injecting millions of dollars into them but also poses potential risks to the system, a Treasury Department official said Tuesday. The department will monitor and examine the trillion-dollar industry, Randy Quarles, the undersecretary for domestic finance, told a hearing of the Senate Banking Committee.

The Federal Reserve will allow more companies to take part in a program aimed at bolstering the money market mutual fund industry. Newly eligible participants now include a range of money market investors, rather than just money market funds, the Fed said. Under the Money Market Investor Funding Facility, the Fed backs purchases of short-term debt, including certificates of deposit and commercial paper that expire in three months or less, from money market mutual funds.

The fast-growing hedge fund industry has boosted financial markets by injecting millions of dollars into them but also poses potential risks to the system, a Treasury Department official said Tuesday. The department will monitor and examine the trillion-dollar industry, Randy Quarles, the undersecretary for domestic finance, told a hearing of the Senate Banking Committee.