Fund Industry

DEAR POWERS That Be in the Fund Industry: After another year of stinking performance and ethics, you're not likely handing out many gifts this holiday season. That's OK, because the "gifts" you've given investors recently - "improved" disclosures that haven't helped investors manage their money - probably should be exchanged for something with a better fit. But in the spirit of the season, I want you to be aware of my holiday wish list, something I have done every few years for nearly a decade.

Senate lawmakers proposed legislation yesterday that would drastically alter the economics of the $7.4 trillion mutual fund industry by repealing some fees and sales practices, while giving independent directors more power to hold down investors' costs . The legislation represents a sweeping reform of the industry that goes well beyond what House lawmakers and the Securities and Exchange Commission have proposed in a bid to stem the widespread market timing...

Recently, a reader sent me a quick note, asking for my prediction of what his fund is likely to do in 2005. I said the fund "is likely to go up ... if it doesn't go down or sideways." I'm not in the business of divining the future of individual issues, but each year at this time, I take a crack at predicting the big stories of the coming 12 months in the fund industry. My selections may not be the fund world's only hot news, but I am confident that we'll see the following in 2005: A failed underground effort by the fund industry to remove William H. Donaldson as chairman of the Securities and Exchange Commission.

Investors continue to show faith in stock mutual funds despite the industry's trading scandals, pouring cash into equity funds at a pace not seen since 2000. Equity funds hauled in a net $14.9 billion in November - the ninth consecutive month of positive cash flows - and the inflow might be even higher in December, according to data and estimates issued this week. Fund flows measure investors' new purchases of fund shares, minus redemptions. Boosted by the bull market that has reversed three years of losses for stocks and lifted the Dow Jones industrial average back above 10,000, equity funds took in $138.

CHICAGO - Wells Fargo & Co. said yesterday that it is buying the assets of Strong Financial Corp., a Wisconsin financial services company that was deeply involved in the nation's mutual fund trading scandal. The price was not disclosed, but industry analysts estimated that it was about $500 million, a fraction of what it would have cost before Strong's wrongdoing was made public. Last week, the Securities and Exchange Commission ordered the company's founder, Richard S. Strong, to pay $60 million in penalties for his rapid-fire trading of the mutual funds the company managed, a practice that regulators say can drive up costs and dilute returns of long-term investors.

Alliance Capital Management Holding LP may pay $250 million to settle mutual fund trading abuse allegations, the highest penalty levied against a U.S. money manager by regulators, people familiar with the situation said yesterday. Alliance, which has said it favored some clients by allowing them to trade mutual fund shares more often than other customers, also may agree to cut the fees it charges as part of a settlement with New York Attorney General Eliot Spitzer, said the people, who declined to be identified.

Seventy-five years and more than $5 trillion after the modern mutual fund was born, the fund industry is finally showing signs of age.For the first time in a decade, Americans' net new investment in stock funds declined last year from the previous year, industry data show.While mutual funds over the past decade may have been the greatest democratizing force in the history of Wall Street -- allowing investors with modest sums to ride the spectacular 1990s bull market -- the industry faces increasing competition for its mountain of dollars.

A top T. Rowe Price Group executive told senators yesterday that requiring mutual fund boards to have independent chairmen is "unwarranted" by recent industry scandals and would do nothing to protect investors from potential management abuses. The Securities and Exchange Commission has proposed the rule as part of its stepped approach to reforming the $7.2 trillion mutual fund industry in the face of recent trading scandals. James S. Riepe, vice chairman of Baltimore-based T. Rowe Price and chairman of the firm's funds, told the Senate banking committee that the proposal "makes no sense to me."

The pending change at the top of the Securities and Exchange Commission is raising mutual fund companies' hopes for a slowdown in new regulations - and perhaps a more forgiving view of industry practices that are under a spotlight. That worries investor advocates, who say that the SEC has yet to deal with a number of important questions involving how funds operate and whether shareholders are treated fairly. The $8 trillion fund industry, which has seen its once-pristine reputation tarnished by a series of scandals over the past two years, is looking to SEC Chairman-designate Christopher Cox for a timeout of sorts.

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.