Are Fundholders Really Indifferent to the Scandal?

Are fund investors indifferent to the market-timing scandal? This was the assertion made in headlines a couple of weeks ago as a result of a survey that found 57% of fund investors were "unconcerned" about “allegations of improper trading practices” in the industry.

So a slight majority was translated into all fund investors. Nearly 100 million Americans own mutual funds, which means about 43 million Americans are concerned about market-timing, yet the headlines swept them out of the picture. Moreover, the 57% figure probably overstates investors' indifference. After all, those who trust the funds they’ve invested in might reasonably be unconcerned about the scandal.

The survey, conducted by Spectrem Group, is quite an interesting read. If you dig into it, you’ll see that the vast majority of fund investors actually take the scandal quite seriously. For instance, 92% said the SEC “should pursue these allegations aggressively and punish those firms found guilty to the full extent of the law.” Furthermore, 62% of this supposedly passive group said they would go so far as to sue their fund company if a fund they held were found guilty of transgressions. About the same number of investors said that any such funds should be removed from their company’s 401(k) plan.

I also found it interesting that 58% said they would watch carefully to see what steps their fund company took to prevent improper practices. This tells me many investors are actively trying to steer clear of firms with ethical problems or flawed compliance systems.

The survey also showed that many investors find it difficult to keep on top of the scandal's developments and fully understand the improper-trading improprieties. That’s understandable given how many variations we’ve seen on the theme of unethical behavior and how many firms have become involved. If you’re trying to keep up with the investigation, you may find our Fund Industry Investigation Update page a helpful resource for keeping tabs on which firms have been caught up in Spitzer’s web.

Get 'Em While You Can
Renewed interest in mutual funds means a number of funds are closing quickly. Small-cap standouts  RS Diversified Growth  (RSDGX) and  Franklin Balance Sheet Investment (FRBSX) closed on May 1, just two weeks after  FMI Common Stock (FMIMX). Our analysts report a number of other funds are likely to close fairly soon.  Turner Small Cap Growth  is approaching its target asset base and could close any day. In addition,  Masters' Select International (MSILX) and  Masters' Select Equity (MSEFX) will probably close this summer.

Poll Results
Last week, I asked whether Vanguard's new sector funds are a good idea or a bad idea. The majority of you, 55%, thought they were a good idea while 45% thought they weren't.