Mutual Fund

The only people who like bad mutual funds are the people who run them. But when a mutual fund firm buys one of its own laggards for investors - or recommends through an its advisory service that investors purchase one of its stinkers for "asset-allocation reasons," that love of a bad fund becomes costly for shareholders. In the fund world, there's an increasing movement toward funds made up of other funds, wrap programs and advisory relationships where a consumer allows a fund company to build a portfolio.

Pat Carter is within weeks of retiring and is coming face-to-face with the financial struggle she will encounter for the rest of her life and the risks she inadvertently took that threw her into the predicament. In 2000, she was about eight years from retiring, and trying to set herself up for the future. But her good intentions backfired. With $2,000, she opened a Roth individual retirement account and followed a broker's suggestion - putting the full $2,000 into a high-risk, aggressive stock mutual fund.

It seems like the perfect pitch for retirees: a financial product that protects principal and offers some growth potential to help fight inflation. Or still a decade or so from retirement but needing to boost returns to hit your number? Another product won't protect your downside but promises twice the market's positive return. These are just two examples of the booming structured-products industry, which last year saw new U.S. issuances jump 44 percent from 2006, to $114 billion, according to the Structured Products Association, a New York-based trade group.

High investment costs remain out of mind when overall returns are strong. Why sweat decimal points when basking in 20 percent gains? But when returns turn meager or slide downward, hefty expenses become visible and painful. Although investors can find low-cost mutual funds, exchange-traded funds and bank accounts these days, it requires research and willingness to read fine print. "Keeping investment expenses low was important a decade ago, but now is critical," said Harold Evensky, certified financial planner with Evensky & Katz in Coral Gables, Fla. "You can't control markets, but you have some control over expenses, and that is important in a low-return environment."

Investors are being offered the chance to drink from the Holy Grail of mutual funds, buying into a mysterious vessel with legendary powers, and yet the very opportunity to use the great chalice could prove that the whole idea is more fantasy than reality. For the first time since 1982, the Sequoia fund is opening its doors to new investors. If ever there was a legendary fund, this is it. Sequoia is the mutual fund started by Warren E. Buffett's stockbroker; Bill Ruane was a friend of Buffett when he co-founded Sequoia in 1970, at a time when Buffett was liquidating his investment partnership and advising his clients to take their cash to Sequoia.

You know it was a bad quarter for stock mutual funds when even Legg Mason's Bill Miller -- whose reputation for stock picking is legend -- ended somewhere near the bottom of the pack. Miller's Value Trust fund lost 19.7 percent in the first quarter, led by untimely bets on technology and telecommunications stocks, such as Sprint Nextel Corp., and Bear Stearns Cos., whose near-collapse and subsequent bailout by JPMorgan Chase & Co. sent markets reeling late in the quarter. It was the fund's worst first quarter since it was established 26 years ago. Miller's slump officially started in 2006, when his record 15-year streak of beating the S&P 500 index was snapped.

As Wall Street tried to make sense of Bear Stearns' near-collapse yesterday, some investors began calculating their exposure to the crisis and potential losses in their mutual funds. Companies that manage large funds, including Baltimore's Legg Mason Inc., Vanguard Group Inc. and Fidelity Investments, plowed millions of dollars into Bear Stearns. They are likely to take a beating on their holdings, but the impact is not cut and dried. Most mutual funds have minimal exposure to Bear Stearns in their portfolios, although some carry larger stakes.

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.

Ed H. in Huntington Beach, Calif. recently read through a proxy statement for the Gateway fund and decided it was time for a change. The fund, which he owned in an individual retirement account, was part of a corporate merger. "They are adding a 5.75 percent front-end load for new investors," Ed said. "Fees will be raised after two years. Although the fund management will remain, I am not sure that their hearts are in it." And so, the 53-year-old investor went looking around for a replacement, settled on Oakmark Equity & Income, and then pulled the trigger.

Legg Mason Inc.'s new chief executive Mark R. Fetting outlined his priorities yesterday to move the Baltimore money manager past its recent struggles, saying a key focus is improving the company's slumping mutual funds and providing better service to clients, some of whom are pulling their investments. In his first earnings conference call with analysts since being named to the job Monday, Fetting did not promise major changes but said management would also focus on improving marketing and accelerating global expansion.