Philly Spot Online Community Forum Chat Directory Classifieds for Philadelphia area

Directory • Classifieds • Forums • Chat • Contact

Home

Directory

Tech

Music

Community

a - b - c - d - e - f - g - h - i - j - k - l - m - n - o - p - q - r - s - t - u - v - w - x - y - z

The Economy | Recognize the problem, then fix fund industry
By Andrew Cassel
Inquirer Columnist

I remember when the daily mutual-fund listings took up less than a quarter of one newspaper page.

Investing your money in one was like going into a bar and ordering a glass of milk. It was fine for kids and little old ladies, but real men bought stock.

Now, of course, there are more individual mutual funds out there than stocks, and about 95 million Americans have $7 trillion invested in them.

Explosive hardly begins to describe the fund industry's growth over the last two decades.

But all that success has obscured certain fundamental problems with the way most mutual funds are organized and run.

Call it the elephant in the trading room.

In theory and in law, mutual funds are supposed to be just that - pools of money invested for the mutual benefit of their shareholders.

Technically, shareholders elect directors, who hire managers to invest their money. In reality, money managers run almost every fund, naming the directors and making decisions on fees and anything else that matters.

It's like the way bars used to operate in states where selling liquor by the drink was illegal. To get around the rules, they styled themselves "private clubs" and handed you a membership card when you walked in.

There was no problem as long as the booze held out and nobody complained about the service. Same thing for mutual funds; the polite fiction about shareholders' owning the funds could be safely ignored as long as investors remained content with their returns.

But the end of the big bull market in 2000 induced people to pay more attention to nickels and dimes. And now federal and state regulators are discovering that one fund company after another has been creatively shortchanging patrons for years - essentially serving the financial equivalent of watered drinks.

Last week, the scandal hit home in the Philadelphia region. Gary L. Pilgrim and Harold J. Baxter, who gained national attention in the mid-'90s as managers of one of the nation's hottest growth funds, resigned suddenly. Their corporate parent said both were connected to so-called market-timing trades in the funds they oversaw.

If such problems were uncovered at one or two fund companies, the industry might be able to shrug it off, saying, in effect: If you don't like one bar, there are plenty of others down the street.

But the list keeps growing. Alliance, Putnam, Strong, Schwab, Janus, Bank One, Bank of America and now Pilgrim Baxter have all been cited for practices that are designed to profit fund insiders at the cost of average, long-term shareholders.

Each revelation makes it clearer that what Jack Bogle calls the "incestuous structure" of the mutual-fund industry is a big part of the problem.

Bogle is, of course, the founder of Vanguard, one of the two biggest mutual-fund groups in the country. Whether you're a Vanguard fan or not, it's a fact that the company was organized around this very issue. And its organizational structure still makes it unique in the fund industry.

Bogle set up the Vanguard funds so they would be independent, and accountable only to shareholders. The funds hire professional investment managers, but can also fire them if they overcharge or underperform. The funds' own directors set fees and make rules on their own.

It's not a foolproof system; no organization of human beings can ever be so. But it has some obvious advantages - obvious now, at any rate - over what has become the typical mutual-fund-industry model.

It's far too early to know where the current wave of fund scandals will lead. I wouldn't predict that we'll see a bunch of firms restructure along Vanguard's lines.

It may be that after dragging some fund managers to court and enacting some new codes of conduct, the regulators will call it quits, and we'll move on.

But it would be an awful shame if, after all the shouting has finished, that elephant was still in the room.

a - b - c - d - e - f - g - h - i - j - k - l - m - n - o - p - q - r - s - t - u - v - w - x - y - z

a - b - c - d - e - f - g - h - i - j - k - l - m - n - o - p - q - r - s - t - u - v - w - x - y - z

Site

International Airport 76ERS Phillies Eagles City of Philadelphia Tourist Info Museum of Art Phila Zoo The Franklin Institute Online Orchestra Flyers Philadelphia University University of Pennsylvania SEPTA Philadelphia.com School District Drexel University Children's Hospital Citypaper Media Center Convention & Visitors Bureau Federal Reserve Bank Stock Exchange Marathon NBC10.com Philadelphia Park The Philadelphia Tribune Archdiocese Bar Association Community College Flower Show Foundation Folk Festival Opera Company

Studio Studio Label Bands Gear Label Links Photos Projects MP3s

Philadelphia Forums Community Directory Businesses