Fund Industry

One on One is a weekly feature offering excerpts of interviews ? conducted by The Evening Sun with newsworthy business 6 leaders. James S. Riepe is the managing director of T. RowePrice Associates Inc., a Baltimore-based mutual funds and : investment management firm. He is also director of the 7 company's investment services division.' Q. What is the outlook for mutual funds, money markets and equity funds in the 1990s in light of the impending bad economic situation?A. Well, we know the '90s will be hard pressed to be anywhere near as good as the '80s.

Baltimore money manager Legg Mason Inc. is overhauling its mutual fund lineup and planning to introduce two products after losing millions last year in the market turmoil and as investors pulled money out of its funds. The reorganization means the company likely will whittle its current offering of 142 mutual funds, Matthew Schiffman, Legg's head of product and marketing, said yesterday. Legg still expects to introduce two new funds in the spring, said Schiffman, who was appointed to the new position in November to create a product innovation team.

FORMER SECURITIES and Exchange Commission Chairman Harvey Pitt said recently that the mutual fund industry was so busy promoting its 80-year history of no big scandals that it might have stopped looking for one. "That long record may have become an excuse for being complacent," Pitt said. "Claims that there have never been a major scandal are totally beside the point if they stopped looking hard for what could happen next." Well, everyone is looking hard now, in light of New York Attorney General Eliot Spitzer's complaint against a hedge fund and four big fund complexes that allegedly made deals that helped big customers at the expense of the little guy. Rooting around the fund industry recently has given me sneaking suspicions of what could happen next in allegations of fund wrongdoing.

Eliot Spitzer's fall from grace brought with it a chance for critics to kick him in the butt on the way out the door. As critics debated his legacy, the consensus seemed to be that he'll be more remembered as "Client No. 9" - his purported designation with the Emperor's Club escort service that was exposed last week - than as the "sheriff of Wall Street," the guy who took on the big investment houses and beat them into submission. What you're hearing about Spitzer - aside from the tawdry details of his costly trysts - is that he was a bully who stopped at nothing to make his point, but often got nothing out of his most famous cases.

THE MORNING after what has now become known as the "Attack on America," a television correspondent was talking about the scene, about how amid the ash and rubble there was paper everywhere. He held up a sheaf of documents that had accumulated around his feet, which he identified as account reports, ledger statements and message slips. There were so many more important things to worry about that day. But now, as America prepares to start its recovery, you might be mildly concerned about your investment records.

I gave up trying to call the stock market for the year ahead in the late 1990s, when I got tired of being wrong. But I still forecast the year ahead for the fund industry. Since I started doing it in 1995, about five of every seven have turned out right, with one forecast being just a bit early and the other being flat-out wrong. There will be other hot news in the fund world this year, but here are a few of the stories - and non-stories - you're likely to see in 2006: A change in market leadership.

THE MUTUAL fund industry came out swinging last week at the Investment Company Institute general membership meeting in Washington. The problem was that it didn't hit anything. Industry leaders droned on about how they represent shareholders and small investors, about how they have done everything right for those investors and how they are tired of being the scapegoat for politicians and critics who want to blame funds for everything wrong in the market. "We're terribly concerned about shareholders, their perceptions of the market and their expectations," ICI chairman Paul Haaga said at a news conference spent mostly in pumping up fund industry achievements.

EACH YEAR at this time, I attempt to forecast the big developments for the fund industry in the coming 12 months. Since I started doing this in 1995, I've gotten about five calls right for every seven I've made, missing one forecast by making it too early and another for being flat-out wrong. I long ago stopped forecasting the stock market. But I'm not afraid to predict that fund investors will see the following things over the next 12 months: Sharply reduced returns for bond funds. It was an exceptional year for bond funds in 2002, with interest rates reaching historic lows that pushed these funds to high performance.

Earlier this year George Schwartz penned a public letter mentioning "abortion on demand" and the "debauchery that has poisoned the culture." But the Bloomfield Hills, Mich., man wasn't writing as a politician, or a member of the clergy, or even a private citizen. Schwartz was performing his duties as the president of a five-year-old family of mutual funds that bases its investment decisions on the core teachings of the Roman Catholic Church. Schwartz's goal: Continue to build on Ave Maria Mutual's roster of 15,000 shareholders who have invested about $450 million in funds that screen out companies that facilitate abortion, pornography and non-marital partner benefits.

THE ASSUMPTION with virtually every type of securities regulation is that it needs fixing, that something was broken during the bull market that led to all of the scandals that have tainted Wall Street in the past two years. But when it comes to the mutual fund industry, the regulatory system isn't broke. That's the primary reason why investors should be against fixing it, particularly with the changes being considered by the Securities and Exchange Commission. The latest idea from the SEC would have the mutual fund industry create a self-regulatory agency, similar to the National Association of Securities Dealers, to oversee the $6.6 trillion business and the thousands of investment advisers involved in it. Aside from the basic fox-in-the-henhouse feeling anyone should get from the idea of a "self-regulating industry group," the big fear investors should have is that creating a new agency would weaken fund oversight rather than improve it. To see why that is, let's consider the basic reasons why the SEC would consider making the change, and the logical outcomes from such a move.

The mutual fund that boasted one of the best runs in the fourth quarter - far outpacing the negative average return of peers - had almost one-third of its holdings in financial stocks. That may come as a surprise, given the global credit crisis that gripped many financial firms and sent domestic markets on a topsy-turvy course for the year. But T. Rowe Price Group Inc.'s Emerging Europe & Mediterranean Fund invests overseas in places that were largely sheltered from that turmoil, including some financial firms.

My youngest daughter received some tarot cards and an instruction book as a holiday gift, and asked me if I knew how to use them. I told her I didn't need cards to foretell the future, because each year around this time I use my intuition - and some really good industry contacts - to predict the big stories the fund industry will see in the coming 12 months. Since I started making prognostications in 1996, about 5 calls in 7 have hit the target, with one forecast being a bit too early and one being just plain wrong.

In the town where I live, the motto of the local high school is, "If better is possible, good is not enough." In the community where most Americans invest - the mutual fund world - the motto seems to be, "If good is possible, why make it better?" That's not a statement on performance - though it could be in many fund shops - but rather an indictment of the industry's steps toward improving fund governance. The industry proved the point again last week by giving itself a big loud pat on the back with the release of a joint survey by the Investment Company Institute, the trade association for the industry, and the Independent Directors Council that details "increased commitment" to shareholders.

The mutual fund business is the proverbial camel, the one that was supposed to be a horse until it was built by committee. It is filled with arcane rules and procedures that can make funds perform more like beasts of burden than thoroughbreds. And while investors have worked their way over the hump and have successfully used mutual funds to reach their financial goals, it's hard not to wonder how the business could be improved. That's what made a recent book, Competitive Equity: A Better Way to Organize Mutual Funds, such a compelling story for investors.

There's a difference between what an investor needs to know before buying a mutual fund, and what he or she wants to know. But if the fund industry is serious in its quest to alter the prospectus - effectively replacing the thick booklet of jargon with a thin "quick-start guide" that it supplements by putting the traditional document online - management should be required to provide consumers with both types of information. Any effort to reform the prospectus - this column discussed last week the move to do just that - should be focused on giving consumers better, more useful decision-making materials.

Dear fund industry bigwigs: I know you're busy trying to put a bow on a solid performance year so that you can sell it hard in 2007, but I'd hate for the holidays to pass without sending a reminder that investors expect results. Performance is not a gift, it's a promise you make to customers. That doesn't mean that you shouldn't be giving patient, long-term customers a little something extra. With that in mind, here is what I want from the fund industry and its regulators this holiday season, on behalf of fund investors everywhere: An assessment of how sister funds work together.

WASHINGTON - A bipartisan chorus of senators called yesterday for sweeping reforms of the $7 trillion mutual fund industry, accusing fund directors of rampant conflicts of interest and taking federal regulators to task for failing to detect management abuses that cost small investors billions of dollars in profits. In a packed hearing room, a Senate Governmental Affairs subcommittee heard more than three hours of testimony from industry officials and federal and state regulators, who described an industry that has routinely allowed big investors to profit from preferential trading schemes and fund advisers to cash in on unchecked management fees.

Earlier this year George Schwartz penned a public letter mentioning "abortion on demand" and the "debauchery that has poisoned the culture." But the Bloomfield Hills, Mich., man wasn't writing as a politician, or a member of the clergy, or even a private citizen. Schwartz was performing his duties as the president of a five-year-old family of mutual funds that bases its investment decisions on the core teachings of the Roman Catholic Church. Schwartz's goal: Continue to build on Ave Maria Mutual's roster of 15,000 shareholders who have invested about $450 million in funds that screen out companies that facilitate abortion, pornography and non-marital partner benefits.

State and federal regulators have won a string of settlements from Wall Street over trading scandals in the mutual fund industry, and more than $3 billion has been secured to be doled out to wronged investors. But determining who has a right to the money and who, practically speaking, will actually get it is no easy task. Should a mutual fund investor who lost pennies or dollars from trading improprieties see that money if the cost to process the claim and mail a check costs more? How far should companies go to track down people who used to invest in a mutual fund if the cost to do so is subtracted from the settlement money?