Three Stories from 2009 that Will Still Matter in 2010

The year 2009 was tumultuous for fund investors.

The March low in equity prices and the subsequent sharp rebound tested even the most seasoned investors and their strategies. Meanwhile, fixed-income investors saw the 10-year Treasury note yield soar from less than 2.5% at the beginning of the year to more than 3.75% by its end, damping the returns off all but the shortest duration funds.

Against this backdrop, the fund industry didn't just survive--it thrived. Sure there were widespread layoffs, an Oppenheimer bond fund disappointment, and even money market concerns. And yes, there was other news including Jeremy Grantham stepping down as chairman from GMO, Bob Rodriguez taking a break from FPA, the retirement of Vanguard chairman and former CEO John Brennan, and the passing of Chris Browne.

But there were no major industrywide scandals involving Madoff-like fraud or theft that many high-net-worth investors experienced in other arenas. And while investors did pull out of equities and put record amounts of money into bonds and money market funds, mutual fund industry assets, and by implication investor confidence, as a whole were not impaired. In fact, 2009 saw the rise of the largest fund in history-- PIMCO Total Return (PTTRX) at a whopping $200-plus billion in assets (yes, billion).

Even though 2009 is about to be behind us, there a few stories we will still be talking about in 2010.

1. An easy one is Jeff Gundlach, one of Morningstar's nominees for Fixed-Income Manager of the Year and Decade. He had a less-than-amicable split with TCW and the row hasn't fully died down. When will his new firm, DoubleLine, start managing mutual fund assets? Will the  TCW Total Return Bond (TGLMX) fund board even consider DoubleLine to manage part of the fund's assets? And the list goes on�

2. Speaking of bonds, there are some new entrants in the arena that may pose a challenge to this usually highly diversified group. Notably, Fairholme is launching a focused bond fund in January. This comes on the heels of Third Avenue's  launch of its Focused Credit Fund  this August.

A focused bond fund is something new for the asset class because most funds hold hundreds of bond issues. But manager Bruce Berkowitz's strong track record at  Fairholme (FAIRX) bodes well for the fledgling fund. Oh, and he happens to also be a nominee for Domestic-Stock Manager of the Year and Decade.

3. Finally, the Supreme Court will decide the Harris case in the spring, the most important mutual fund case in decades, which could potentially put pressure on mutual fund fees and fund industry profit margins. Because this case may go back down to the district court for trial after the Supreme Court makes its decision, this could drag out (unfortunately). And while we're on legal topics, we probably haven't seen the last hearing on target-date funds or money market reform. The legislators, regulators, and the other "�ors" will have their hands full next year.

There are more topics from this year we will still be discussing well into next year. Which ones matter the most to you? Let us know what you think.

Illinois 529 Settlement with Oppenheimer Biggest Yet
Illinois' landmark $77.23 million final settlement with OppenheimerFunds is the largest to date in the college savings industry and will be divided among an estimated 80,000 Bright Start College Savings Program investors. The amount will be based on each investor's exposure to Oppenheimer Core Plus Fixed Income Strategy (a separately managed account run similar to  Oppenheimer Core Bond (OPIGX)) during the period from Jan. 1, 2008, through Jan. 25, 2009.

Illinois' settlement amount eclipses Oregon's tentative $20 million settlement announced in November 2009 and is roughly $10 million more than New Mexico's tentative settlement agreement announced early this month. More state-sponsored 529 plans that were affected by Core Bond's missteps, including Maine, Nebraska, and Texas, have yet to announce any settlement agreements, but they are unlikely to be as large as Illinois given their smaller asset size and less overall exposure to the troubled fund.

Oppenheimer Core Plus, and its retail sibling Core Bond, were sold and marketed as conservative fixed-income investments. However, the fund's prior management team wound up taking big risks in the fund through an outsized bet on commercial mortgage bonds particularly through derivatives called total-return swaps that had a leveraging effect on the fund. These positions magnified the fund's trouble when the market sank in late 2008. Core Plus shed 38% of its value in 2008, while the typical intermediate-term bond fund lost just 5%.

Illinois is not seeking to recover all losses in Core Plus, but to recover what state officials call losses due to mismanagement, which doesn't include losses that they've determined were caused solely by the tumultuous market conditions of 2008. According to Illinois officials, the settlement will effectively reduce the fund's losses from 38% to 19%.

Mutual fund analyst Greg Brown contributed to this report.