Some scandal-tinged funds worse than others

Your Funds

Your Money

March 21, 2004|By CHARLES JAFFE

IT HAS BEEN six months since investors started pondering how to treat fund firms implicated in the trading scandal that has blossomed into the largest crisis of confidence in mutual fund history.

The gut reflex was to shun any firm tainted by trouble. Indeed, within days of the first allegations, the influential analysts at Morningstar Inc. recommended exiting the first fund families tagged.

That recommendation, which did suggest sticking in funds where a hasty departure would trigger big capital gains, set a tone that sent a lot of money into motion.

Yet many investors adopted a wait-and-see posture, hoping not to unload favorite funds that were not directly affected by trouble and worried that the fund family they moved to might be next. That second concern still exists, as regulators have said there are more charges to be filed.

But it's safe to look at the fund firms now and not feel hasty about judging them.

Clearly, no one is out of the sin bin yet. No investor should be rushing to reward these companies with new cash.

Still, there are conclusions to be drawn about how the troubled firms have responded to trouble, and how investors might want to respond to those firms now.

The good

Given their past record on similar issues, Putnam and Alliance are surprising picks for the two firms that have made the most progress since first getting in trouble.

Unlike most firms embroiled in this mess, Putnam and Alliance were quick to admit wrongdoing and settle with regulators.

More important, the firms have made changes not only to corporate executives but to how they run money.

Putnam brought Ed Haldeman over from Delaware Investments before the scandals were aired, and he took over the top job after Larry Lasser resigned. At Alliance, the crew from Sanford Bernstein has brought a new disciplined approach to the funds.

Both firms must improve performance as much as governance to regain any investor confidence.

Early signs are good enough that investors who have ridden this far can start feeling a little better about the companies now.

The neutral

Excelsior, Federated, Scudder and Seligman have all acknowledged problem trading relationships, but are not yet facing charges.

Pimco and Franklin are facing charges that appear isolated and, compared to others, relatively minor.

In these cases, the basic rule remains the same: Abandon any fund directly involved in the scandal, consider getting out of funds from these firms if you can leave without drastically limiting your retirement plan options and without facing enormous capital gains, and send your new money into new choices.

The bad

As in, they still look really bad.

Alger and PBHG both saw top executives involved in cases that have been settled with regulators.

The identified bad guys are gone, although the firms look and feel largely unaffected. But both firms had very little going for them from a performance standpoint before they got into trouble, and there is little reason to think things are improving much now.

OneGroup was involved from the first day of the scandal, and simply hasn't done enough since to inspire confidence. Invesco wasn't in as early, but it hasn't been any better.

Without some performance upgrade, all of these firms fail the "Is this a shop I want to invest with?" test by a long measure.

The ugly

Bank of America's Nations Funds was part of the initial complaint and had little visible movement until it -- and merger partner FleetBoston Financial's Columbia unit -- reached a record settlement with regulators this week.

Between ripping off kids in Columbia's Young Investor fund, no admission of wrongdoing, limited change in the organizations' structures and management likely being more focused on merger stuff than governance issues, both firms stay in the "avoid" category for now.

Strong has appeared more concerned about selling off the management company than addressing the charges.

Compared with other firms, it was slow on the trigger to get rid of the top executive involved, in this case company founder Richard Strong.

The problems at Janus stem from unanswered questions. The firm finally hired a new chief investment officer last week, but questions remain about the depth and direction of the company's management team.

Worse yet, there are still no answers about top management's knowledge of the trouble that was brewing.

MFS initially planned to re-hire top executives once a suspension expired, but have scrapped that plan. Tuesday, they unveiled a slew of positive changes that will help make sure the trouble doesn't re-surface, but the management change at the firm is too new for any investor to feel that things have moved to neutral.

For all of the troubled companies, the future hinges on improved governance and performance, and fast. If we celebrate the one-year anniversary of the scandals without much movement, it may be time to cross these firms off the list forever.

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