Mutuals lose luster with middle class
By Allan Drury
(Westchester, N.Y.) Journal News
Mutual funds seemed to be the perfect investment instrument for John Ahearn in the 1980s, when the stock market was flying high and the United States enjoyed a full-employment economy.
Ahearn, looking toward retirement and his son's upcoming college expenses, entrusted money to Putnam Investments, a Boston company known for sound money management.
But the 55-year-old retired hospital administrator from Yonkers, N.Y., took his money out of Putnam funds last year after the company became the first firm formally accused of wrongdoing in an investigation of the industry.
"The idea was to give your money to qualified, credible, trustworthy managers who would manage your money better than you could yourself," said Ahearn. "What we got was guys who weren't credible, who weren't qualified and who weren't trustworthy."
History will recall 2003 as the year the mutual fund industry lost its reputation as the last bastion of integrity in the cutthroat world of financial markets.
The scandal — a series of long-running schemes that enriched wealthy investors, fund companies and fund managers at the expense of people like Ahearn — is particularly stunning because mutual funds are supposed to be safe havens for those looking to avoid the risk of individual stocks.
The concept was a popular one throughout the 1980s and '90s. Data from Lipper Inc., a research company that tracks the industry, shows mutual fund assets increased 26 times from 1983 through November 2003.
Investors were rewarded for their trust with annual returns that regularly reached double digits.
Four months of publicity about the scams, mea culpas by fund companies and a blizzard of subpoenas from New York Attorney General Eliot Spitzer and other investigators has investors disgusted with an industry they once revered.
Dozens of interviews and statistical evidence indicate that investors have not given up on mutual funds, but they are wary, particularly of the 25 or so companies ensnared in the scandal.
Lipper said $22 billion flowed into stock mutual funds in November, compared with $23.8 billion in October. But the survey showed that while mutual fund assets were increasing, the assets of companies implicated in wrongdoing shrank.
"The money is still going in, and the market is still going up, but the question is how much money would be going in ... if you didn't have this scandal," said Mercer Bullard, chief executive of Fund Democracy, an investor advocacy group.
Spitzer, on an anonymous tip, stunned the public in September with revelations that some of the nation's largest fund companies had allowed wealthy investors to make improper, profitable "late-day" and "market-timing" trades.
As Spitzer and the federal Securities and Exchange Commission dug deeper, they found an industry beset with conflicts of interest.
For many middle-class investors, it was confirmation that financial markets are rigged to benefit the rich and powerfully connected.
"I was mad at them because people were putting their retirement money in," said Baqi Asad, 35, of White Plains, N.Y.
Asad said he invested $10,000 with T. Rowe Price a decade ago and got a return of about 40 percent. Though the firm has not been implicated, Asad said he would do extensive research if he ever decided to put more money into a fund.
