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Here's a more eloquent and less colorful and earthy
commentary about the mutual fund scandal than I could articulate.
(:-)
Chas
====
<FONT
face="Times New Roman MT Extra Bold" color=#0000ff size=5>STREET SMART
REPORT ONLINE <FONT
face="Times New Roman MT Extra Bold">Sy
Harding
<A
href="">www.StreetSmartReport.com
From: Asset Management Research Corp. Our 16th
year of providing research to serious
investors!
<IMG height=22
src="gif00744.gif" width=70 border=0>
BEING STREET SMART
by Sy Harding
STOP THE FOOLISHNESS!
November 14, 2003.
In last
week’s column about the unfolding scandal involving mutual funds, I said,
“Here’s a little prediction. In whatever rules they come up with to clean up the
situation, the SEC and the mutual fund industry will also take advantage of the
publicity surrounding the scandal to further penalize the victims - public
investors - for their own purposes.”
<P class=MsoBodyTextIndent
>Apparently those attempts are
underway. Mutual fund investors had better pay attention to what is going
on.
As I
pointed out last week, the scams are being incorrectly and misleadingly labeled
as a ‘market-timing’ scandal. The problems uncovered at a growing number of
mutual fund families took two forms. The first consisted of ‘late trading’, a
scheme in which the funds allowed some of their large customers to enter or exit
after the fund’s 4 p.m. closing time, and still get that day’s price, rather
then the price at the end of the next day, as would ordinary investors. The
second activity involved funds that have published restrictions calling for
minimum holding periods, and charge a ‘redemption fee’ if an investor exits the
fund earlier. Some of those funds have been allowing favored customers, mostly
hedge fund managers, to trade much more frequently, repeatedly entering and
exiting within days, without charging the penalty, while imposing the penalty on
ordinary investors if they don’t hold the fund for three months.
New York
Attorney General Eliot Spitzer rocked the mutual fund industry when his
investigators began to uncover this unfair treatment of public investors.
Unfortunately, he referred to the situation as a “market-timing scandal”,
leaving the impression that normal market-timing, buying mutual funds for
rallies and then taking the profits before the market declines again, is somehow
illegal or unethical.
As Roger
Schreiner of Schreiner Capital Management Inc., puts it, “Confusing messages
about market-timing have appeared nationwide, in print, on the radio, and on
television programs. Even some government officials seem confused about what
market-timing is and whether or not it’s illegal. Some others, even those who
understand that market-timing is legal, now think it must be unethical. The
truth is that risk management in the form of market-timing is the common sense
approach to creating and maintaining wealth over the long term.”
<P class=MsoBodyTextIndent
>Meanwhile, as expected, the mutual
fund industry is exploiting the publicity over its illegal actions being
misleadingly identified as a market-timing scandal, to push for something
they’ve always wanted. That is some means of imposing a buy and hold strategy on
investors, by locking them in more once they have bought into a fund.
The
Investment Company Institute (ICI) is the official organization of the nation’s
mutual funds. Testifying before a Congressional committee looking into ways to
prevent mutual funds from ignoring current regulations and their own published
rules, its spokesman made a recommendation that turns the victim/perpetrator
role on its head. He recommended that mutual funds, not just those that choose
to, but most funds, be required to set minimum holding periods for investors,
and increase the penalty for early withdrawal to more than the 2% that funds
with minimum holding periods now
charge.
That is
a flat out ridiculous solution, having nothing to do with the problem. It was
not ordinary investors that allowed favored customers to trade after-hours, or
to trade in and out more often then the prospectus of the funds allowed. It was
the funds themselves. It was also not ordinary investors who were trading in and
out more often than the funds’ rules allowed. It was a few favored hedge fund
managers, and in some cases the mutual funds’ own managers, whom the funds
allowed to break the rules. So why is the solution not to simply make mutual
funds and their managers abide by the laws, and apply their own rules equally?
What has locking ordinary investors - the victims of the scam - into<SPAN
> a fund longer than they may want got to
do with it?
Mutual
fund investors should be up in arms about it.
There
are more than enough mutual fund regulations to control the situation. All that
is needed, or was ever needed, is that they be enforced.
<P class=MsoBodyTextIndent
>Meanwhile, normal market timing, or
active portfolio management, was not involved in the scandals at all, but is
getting a bad rap. Unfortunately that is happening just as the recent bear
market had finally made investors aware of how they were abused by Wall Street’s
long-standing advice to be buy and hold investors. Even previously staunch Wall
Street advocates of buy and hold investing like the Wall Street Journal, have
been writing about how tactical asset allocation, yet another term for
market-timing, is gaining greater credence “as a means of better handling the
market’s ups and downs”.
John
Sosnowy, author of <I
>Everything You Know About Investing Is
Wrong, says, “Market-timing just means that you’re not willing to take it no
matter what the market does. The attraction is not better returns in a bull
market, but that it will probably significantly reduce your drawdowns in a bad
market period.”
If the
mutual fund industry has its way with Congress and the regulators, using most
mutual funds to achieve that goal will become just a bit more difficult for
ordinary investors. On the other hand it will make fund families like Rydex, and
ProFunds, which advocate and welcome market-timing, and exchange-traded-funds,
even more attractive.
<SPAN
>Sy
Harding is president of Asset Management Research Corp., DeLand, FL, publisher
of The Street Smart Report Online at
www.StreetSmartReport.com and
author of 1999’s Riding The Bear – How To Prosper In the Coming Bear
Market!
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