Big stories about funds in the wings for this year

Your Funds

January 02, 2007|By Charles Jaffe | Charles Jaffe,Marketwatch

Each year at this time, I predict the big fund-industry stories of the coming 12 months, the kinds of issues that will be newsworthy.

Since I started making prognostications in 1995, five calls out of seven have typically turned out right, with one forecast being a bit too early and the other being flat-out wrong.

I am confident that we'll see the following in 2007:

More bad guys - and more outrage - from the most-recent industry scandal.

In 2006, Bisys Fund Services - which provides backroom operations for more than two dozen small fund families - revealed that it had been paying kickbacks to some of those funds in order to get and keep the accounts. Shareholders funded the kickbacks through increased expense ratios.

Bisys was not alone in this practice; other service providers are being investigated. Chances are good that more bad arrangements - mostly involving smaller fund firms - will come to light in '07.

When it becomes clear that this was a more widespread practice, investors may figure out that the real problem is that asset managers were the ones requesting the paybacks, effectively telling the service providers to skin shareholders.

Hundreds of millions in payments to stop another issue from becoming a scandal.

Fidelity Investments recently agreed to pay more than $42 million to reimburse its funds for improper gifts and gratuities accepted by some of its traders. It took this step even though an independent review produced no conclusive evidence that investors were harmed when traders violated company policy and accepted travel, entertainment, gifts and more from firms courting Fidelity's business.

Fidelity was not the only one accepting gifts (the brokerage firms aren't buying luxury boxes at sporting events to leave them empty); expect several fund companies to disclose similar problems - and make big-dollar, fast-and-easy settlements.

An actively managed exchange-traded fund.

I made this same call a year ago and was just a bit early and optimistic; several new funds based on "semi-active" tactics passed regulatory muster and hit the market.

The next step in the evolution of ETFs - which traditionally act like an index fund but trade like a stock - is an offering that is actively managed. It may be an ETF flavor of your favorite mutual fund, but more likely will follow an aggressive, tactical-allocation strategy.

A bright idea gaining grass roots support.

Recent mutual fund reforms have amounted to new disclosures that average investors typically don't understand or ignore.

One idea that might gain populist support would force fund companies to say on every customer's statement just how much a shareholder paid in fees. So while the fund might post an expense ratio of 1.35 percent, its customer statements would include a line saying "Your account gained (or lost) X dollars this year; you paid management Y dollars to achieve that performance."

Congress is likely to be looking for something to help investors in retirement plans, and those investors don't have the free-and-easy ability to say, "Look at how much I paid for that terrible performance!" and then move unfettered to another fund.

Ultimately, Congress won't make this happen in '07, but this is such a common-sense idea - and fund companies so hate it - that it could start to grow legs.

Fund tax reform falling short ... again.

Reasonable mutual fund tax-reform proposals drew bipartisan support from dozens of lawmakers, but didn't get out of committee in 2006. So rather than bore you with the details of the proposed changes, I'll simply point out that it will be more of the same in '07; the best hope for this legislation is that it becomes an election-year enticement for voters in 2008.

Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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