Equity mutual funds may have taken in a net $88.7 billion during the first quarter of 2004 (the largest inflow since 2000), but that doesn’t mean retail investors are unconcerned about the raft of scandals that continue to plague the mutual fund industry.
According to a recent survey from the Spectrem Group, a research and consulting firm in Chicago, 40 percent of respondents said they were “concerned” or “very concerned” about allegations of improper trading practices. The majority of mutual fund investors (66 percent) were specifically outraged about preferential treatment of the individuals and corporations involved in abusive practices. Fifty-eight percent of investors were concerned about adequate disclosure of fees, and surprisingly, market-timing and late trading were near the bottom of investor concerns (37 percent).
Needless to say, the survey found that 92 percent of the respondents want the SEC to pursue “aggressively and punish” firms found guilty of improper activities, “to the full extent of the law.” Ninety-one percent think guilty parties should have to compensate shareholders, and two-thirds would participate in a class-action suit if a fund in their portfolio were found guilty of improper practices.
The survey also found a direct correlation to wealth and level of concern. Twenty-five percent expressed no concern at all about the mutual fund scandals, a sentiment that increased dramatically as income level went up. Ann Mahrdt, a director at the Spectrem Group, says this is a possible indication of the more sophisticated asset allocation—and therefore less reliance on mutual funds—within portfolios of wealthier investors.
When asked if they held a negative opinion of any particular companies within the industry, 26 percent replied “yes.” Although 13 percent didn’t mention a particular firm, 22 percent named Putnam Investment Management, while 10 percent named Janus and Strong Funds, all of which received significant press coverage. A substantial number of respondents (40 percent) mentioned a variety of other entities, many of which are not mutual funds—such as Enron and WorldCom, “highlighting again the lack of knowledge regarding the mutual fund situation,” the report says.
Often referred to as one of the most basic and best investment vehicles for all types of retail investors, providing diversification at an affordable price, a surprisingly high 33 percent of the 402 people surveyed rated their knowledge of the mutual fund as “low” or “very low.” Only 31 percent said their knowledge was “high” or “very high,” and 37 percent said their knowledge was “neither low nor high.”
“Overall, there seems to be a lack of knowledge about mutual funds, which was pretty surprising,” says Mahrdt. A substantial number (44 percent) reported little or very little understanding of the “current allegations of improper trading practices.” Thirty-two percent said they knew some and 15 percent said “much,” but only 7 percent said they knew “very much” about abuses within the industry. Broken down by demographics, men are more than twice as likely to know “much” or “very much” about current allegations, as are middle-aged investors (age 45 to 64) and those with incomes above $50,000.
But despite all the concerns, there seems to be recognition among investors that mutual funds are still the only game in town. Sixty-nine percent of investors still think mutual funds provide the best opportunity for a diversified portfolio, and 42 percent “do not think the mutual fund improprieties are widespread across the industry.”
That said, investors will be watching with a careful eye: The survey found more than 50 percent of investors plan to monitor the news for new charges of impropriety. And 58 percent eagerly await information from their investment company about strategies for preventing more abuse from occurring.