Is The Mutual Fund Industry Totally Corrupt?

Well, we have seen the first rumblings…a bunch of PUTNAM fund managers are set to be convicted. Also, traders at PRUDENTIAL are being investigated,charges include illegal after-hours trading, possible “pump-and-dump” schemes,etc.
Is this the beginning of a major expose of the mutual fund world? Something like half the US poulation now own shares in mutual funds…is it time to get out? Suppose mojor abuses are uncovered…are the shareholders about to get screwed again?
Or is it better to sit tight and see what happens?
Personally, I’ve been liquidating my MF shares (and buying individual staocks)-its worked much better for me (so far).

CNBC, CNNfn, Fox and others have recently had financial gurus on their shows tackling this issue, as have the local papers. They all agree it is not time to panic, bail out of funds, etc. but rather adopt a wait-and-see approach. Unsophisticated investors like me will not want to do without the many benefits & advantages offered by mutual funds. The entire stock market did not fall apart when the airlines, WorldCom, and Enron did. Neither will the MF mkt. disintegrate because of market timing and other indiscretions committed by certain fund mgrs., according to these experts. Hope they’re right.

It’s still a little early to be able to gauge just how extensive the problems in this industry are. It might just be that there are some problems around the margins, bad practices that have only very tiny effects on the average investor. Or, they could be screwing all of us royally.

[Caution - unsubstantiated opinion in the road ahead!] I bailed out of my actively managed mutual funds a while back, and have put everything into a variety of index funds (large cap, small cap, international, bonds). I recall seeing the statistic that, in any given year, only about 20% of the fund managers will outperform the market indexes. The catch, of course, is that, from year to year, it’s not the same 20%. So, a fund may do very well for a couple of years, then tank (I certainly witnessed that first-hand). A fund that’s been languishing for a few years may suddenly catch fire, and do much better than the indexes.

Since there’s almost no way of telling which fund is going to outperform, and which is going to underperform, I figured the smart bet was to stop trying to “game” it. They’re not kidding when they say that past performance is no guarantee of future performance. I’d go beyond that, and say that it’s not even a reliable rough guide.

Finally, because an index fund isn’t actively managed (a computer can take care of most of it), and because its holdings are so broad, there’s much less likelihood of shenanigans by the fund company. Being able to buy mutual fund shares at 4:10 pm when Intel has just announced disappointing earnings is a big advantage when the fund contains only 20 tech stocks, but is much less advantageous when the fund contains 500 large cap stocks.

Buying individual stocks can certainly work, if you have the time and energy to do your research, but most people don’t, and end up getting burned (remember all those “buy” recommendations on Enron, Worldcom, Global Crossing, et. al.?).

I consider that the mutual fund shareholders (people like me) have already been screwed. That there is going to be less future screwing going on. (Of this type. These people will just think of new ways.) Some of the money that we lost will be recovered after years of judicial proceedings, i.e., the lawyers will get what little money is set aside for shareholder compensation.

I seriously doubt anyone is going to jail. Look at what happened to those crooked Xerox execs: threw the companies stock into the toliet, killed any chances of it ever regaining its former standing, made a killing by robbing the company blind. No jail term, just fines. And guess what? They had their contracts (which they wrote up) set up to protect them from paying fines. So Xerox now loses more money paying the fines of their ex-execs. Wow.

All these cases will pretty much turn out this way, except for Martha Stewart. “They” need someone famous to throw into jail no matter how tiny her crime is compared to the rest.

Remember the S&L bailout of the late 80’s. Hardly anyone got a slap on the wrist, let alone jail time. A trillion dollars stolen.

What bothers me most: the crooks like ken Lay (ex-ENRON President) can hire lawyers to keep them out on appeal indefinitely. Lay and his minions stole billions, and yet have suffered NO punishment to speak of. Suppose the managers of several large mutualfunds got together and decided to trade stocks between themselves…they could enginer ana rtificial run-upin the price of the stocks, then “dump” them on unsuspecting investors. And, a few juducuous bribes to “analysts” to make these stocks seem attractive…the possibilities are endless.