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Lipper
Muriel Siebert & Co.


Fund Problems: Funds Doing Well In Spite Of Industry Problems



Whenever I'm invited to a dinner party these days, I know that somewhere between the hors d'oeuvres and dessert the topic will switch to mutual funds, Inevitably, someone will ask me about the publicized scandals in the business and what to do with current fund investments.

The way I see it, there are two ways I can handle this situation---either stop accepting dinner invites or give my opinion. So, at dinner the other night when a friend as me what she ought to do with her Putnam fund investments, my response had as much to do with personal investing goals as it did mutual fund scandals.

First, let's talk about those scandals. The improprieties going on within the mutual fund industry today-including market-timing (not illegal) and late-trading (illegal)-are more of a disgrace to the fund industry than they are scandalous. After all, the definition of "scandal" from the dictionary I've got sitting on a shelf above my computer, reads "conduct that causes or encourages a lapse of faith or religious obedience in another ". Since mutual funds aren't religious entities, although a few use faith-based criteria when selecting securities for their portfolios, a better choice of words to describe the situation might be "dishonor" or "discredit". That neither minimizes the seriousness of the problems the fund industry is facing, nor leaves me scratching my head trying to figure out just what Dick Strong (the former chairman of Strong Capital Management) was thinking, Rather , it keeps how we think about this issue in a manageable perspective.

The mutual fund industry does have some housecleaning to do. Not only does it, and its legislative bodies, need to create rules that all investors---large and small---must adhere to, other issues need to be addressed----such as how fund boards of directors are selected and the roles they are to play; the ethics of those selling funds to the retail public; as well as making sure investors are clear on issues as simple as fund breakpoints and who's managing their investments.

While there will no doubt be more bad news about mutual fund investing in the months ahead, the problems facing the mutual fund industry today, will be corrected and aren't industry shattering.

Had the fund industry's problems been revealed at another time, like during the great bull market of the 1990s, the problems probably wouldn't have made the headlines of papers or been heard on nightly news.

"At a different time, all of the things going on would be addressed as things that were happening within the fund industry and not portrayed as a scandal, " says Geoff Bobrof, president of a mutual fund consulting firm bearing his name in East Greenwich, Rhode Island.

And he's right----but that wasn't the case. The problems within the fund industry came after an extended bear market that few expected and one that walloped the returns gained from a previous unprecedented 15-year bull-market run.

One problem that extended bull market created ---folks seem to forget that the very natural tide of Wall Street is one that runs in cycles---sometimes hot, sometimes not.

Today, the performance of stock funds looks very different than they did at year-end 2002. At the end of last year, the average stock fund closed the year down over 22 percent. This year, despite of all the fund industry's bad news, fund performance is something worthy of making headlines: The average U.S. diversified equity fund that Lipper tracks was up 27.6 percent year-to-date through November 6; the average sector equity fund ahead 34.2 percent; the average world equity fund up 28.4 percent; and the average mixed equity fund ahead 15.1 percent.

The rally that we're seeing in mutual fund returns isn't just in science and technology funds (although that kind of fund type has seen the most gain as the average fund in that category was up over 57 percent year-to-date). Rather, it's across the board and around the globe with fund types like various small-cap funds, emerging markets, Latin American and Japanese funds ahead in the high 30-plus and 40-plus percentages. The only fund type not showing positive returns this year are specialty diversified equity funds; the average fund in this grouping where you'll find bear-market type funds listed, is down 6.4 percent.

Back to the question my friend had about keeping her Putnam fund investment. Rushing to sell fund shares when you're reacting to bad news has never been sound investing advice. Rather, looking at changes in the fund family, the fund's manager or investment objectives, and its current past performance history makes better sense. So, I suggested she look at the past performance of her fund and measure how it ranked against other like funds. It's then her task to decide if this fund still meets her investment objectives and if not, to speak with her investment advisor and find a handful of other fund alternatives, read their prospectuses and decide what a better choice might be.

Whether you're an old hat at fund investing or new to it, there will always be bear and bull markets, bad investment choices and improprieties within the investment area. It's all a part of the money-making game. The way that you can effectively manage your way through it is to keep focused on your needs first. Then find the appropriate products to meet them.


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