You know that the mutual fund industry is in a bind when even T. Rowe Price (NASDAQ:TROW) is pulling up lame.

The mutual fund operator posted a profit of $0.31 a share before one-time impairment charges during the fourth quarter. That may be better than the $0.25 a share in net income that Wall Street was projecting, but it's well short of the $0.68 a share it earned a year earlier. Net revenue fell by a sharp 30% to $416 million, shy of analyst expectations.

Naturally, the fourth quarter wasn't a good one for most fund operators. Assets under management at T. Rowe fell by 20% sequentially, and surrendered a more sobering 31% drop through all of 2008. These aren't defections that we're talking about. T. Rowe fund owners are apparently a pretty loyal lot. Net cash inflows were positive for all of 2008 and fell by a mere 1% during the heartbreaking final quarter. In other words, it was the market pounding away at the value of the fund holdings that led to the sharp asset declines.

I guess the real question now is if the accounts will stick around once they receive their grim year-end statements.

It's an answer that may be easier on T. Rowe Price -- a company that has several well-ranked funds -- than a company like Legg Mason (NYSE:LM) that watched over some of last year's biggest losers.

However, as more fund operators have been chiming in with their quarterly reports, it's clear that the industry is in a good deal of hurt.

 

Q4 2008

Q4 2007

T. Rowe Price

$0.31

$0.68

Janus (NYSE:JNS)

$0.05

$0.36

Federated Investors (NYSE:FII)

$0.54

$0.52

Franklin Resources (NYSE:BEN)

$0.52

$2.12

AllianceBernstein (NYSE:AB)

$0.29

$1.06

Legg Mason

($4.52)

$1.07

With the exception of Federated, earnings fell precipitously for fund families this past quarter. Things aren't about to get easier in 2009. The companies are watching over roughly a third fewer assets than they were at the beginning of last year. You also have redemption fears creeping in as fund holders assess the brutal drop in the net asset values of their funds.

Why take the chance? I have no problem recommending mutual funds -- even funds in some of last year's laggards -- at this point. Heck, even the unrealized losses can be whitewashed as a taxable benefit. Funds can pair the sale of winners with losers in their portfolios to minimize taxable distributions later this year. However, I am not as enthused about the publicly-traded operators. Fewer assets under management, morale hits after the inevitable layoffs, and past performance numbers that will be tough to market are going to linger here.

Buy the funds. Sell the fund companies.

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Alliance Bernstein Holding L.P. is a Motley Fool Income Investor recommendation. Legg Mason and Federated Investors are Motley Fool Inside Value picks. The Fool owns shares of Legg Mason. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz buys mostly stocks these days, but he always has a fund or two in his portfolio. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.