The ongoing scandal involving crooked mutual fund managers and rotten companies is a worst-case scenario of why we at The Motley Fool have always recommended index funds over most actively managed mutual funds. As I said when the scandal first broke, we're a long, long way from being done, and the number of companies implicated is sure to rise. The latest disclosure is that Strong Investment's CEO Dick Strong might be indicted for trading in his own accounts ahead of his funds' purchases for their clients. You don't think this was rampant?
On Friday Marsh McLennan
While I generally don't invest in funds, I'm plenty interested in investing in fund-management companies. More to the point, I'm interested in the publicly traded fund companies that are untouched by scandal. These include T. Rowe Price
Why the interest in fund managers? First of all, fund management is a great business. But secondly, while some pundits have been talking about the danger of unwinding at tainted funds, I think that's garbage. If people pull their money out of the dirty funds (which is happening, but not in volumes that it deserves to happen), there will be redemptions, but it's not like this money is leaving the market. These investors haven't given up on stocks, they've given up on these particular funds.
Now, if you've made the decision to pull your money out of a fund company due to its being implicated by scandal, and you're determined to be invested in funds, would you go to another fallen fund, or one that hasn't even the hint of impropriety?
What will happen is a nearly historic reshuffling of the same assets to different fund companies. Fund investors are sedentary -- they don't move their assets around much, and the average fund redemption per year sits below 10%. Putnam's lost that much in a month. Janus
That money's got to end up somewhere. And in a business where assets under management are the best determinant of profitability, those white knight fund companies may soon learn that toeing a cleaner path offers its own rewards.
Give your take on the recent scandals on the Mutual Funds discussion board.