Morningstar's Take on the Fund Industry Scandal by Morningstar Analysts

Morningstar ^ | 11-20-03 | Morningstar Analysts

[Grampa Dave]

Special Report

Morningstar's Take on the Fund Industry Scandal by Morningstar Analysts | 11-20-03 | 10:00 AM These are trying times for fundholders. The mutual fund industry is supposed to be a safe haven for small investors, but allegations have surfaced that fund companies have allowed certain shareholders to get preferential trading deals, while some fund managers have taken advantage of their positions by market-timing their own funds. The allegations are far-reaching and demonstrate huge holes in the fund industry's fiduciary responsibilities.

To give investors more guidance on how to respond to developments at specific fund companies, we've collected Morningstar's coverage in this Special Report. We'll continue to add new articles to this page as news develops.

Our Take on the Fund Firms Under Fire

Alger Our recommendation (10-20-03) Alger exec admits tampering (10-17-03)

AllianceBernstein A wake-up call for AllianceBernstein's fund board (11-17-03) Our recommendation (11-11-03) Two Alliance execs asked to resign (11-10-03) Alliance suspends tech fund manager (09-30-03)

Federated Federated's fund board needs to break the silence (11-17-03) Our recommendation (11-13-03)

Janus Our recommendation (09-12-03) Janus' Garland resigns in wake of market-timing scandal (11-18-03)

Loomis Sayles Loomis Sayles says two clients made short-term trades (11-13-03)

Marsico Our recommendation (09-15-03)

Nations Funds Our recommendation (09-05-03)

One Group Our recommendation (09-12-03)

PBHG Our recommendation (11-21-03) Pilgrim and Baxter step down amid timing revelations (11-13-03)

Putnam Putnam Settles with the SEC (11-13-03) Our recommendation (11-03-03) Why Putnam's trading mess rankles (10-28-03) Putnam says four money managers timed funds (10-24-03)

Strong A call to action for Strong's fund board (11-17-03) Matrix postpones joining Strong (11-05-03) Dick Strong accused of timing his firm's funds (10-30-03) Our recommendation (09-12-03)

Our Take on Developments in the Industry

Q&A with Morningstar's Don Phillips How safe is it to invest in mutual funds? Readers get our answers. by Harry Milling, Product Manager

Evaluating Scandal-Tainted Fund Firms An outline of Morningstar's review and recommendation procedures. by Russel Kinnel, Director of Fund Analysis

Don Phillips' Congressional Testimony Morningstar offers four principles for improving the fund industry. by Don Phillips, Managing Director

What to Do with Scandal-Tainted Funds How to decide if you should hold or sell. by Russel Kinnel, Director of Fund Analysis

Front-Running Threatens to Widen Fund Scandal Meanwhile, Fidelity and Bogle call for an end to specialist trading. by Russel Kinnel, Director of Fund Analysis

Fixing Mutual Fund Boards Directors need the tools and the time to do right by fund investors. by Russel Kinnel, Director of Fund Analysis

Can Your Fund Protect You from Market-Timers? Fair-value pricing solves some problems, but raises others. by Gregg Wolper, Senior Fund Analyst

A Black Eye for the Fund Industry Fund firms face stunning charges of profiting at investors' expense. by Russel Kinnel, Director of Fund Analysis

http://news.morningstar.com/doc/document/print/1,3651,99248,00.html

[Grampa Dave]

This is an excellent ongoing summary of what has happened in this recent mutual fund scandal.

You may want to go on site to take advantage of their recommendations if you own one of the funds involved.

[A CA Guy]

Guess the only safe place for your money these days might be lottery tickets.

[Travis McGee]

Right now, GOLD!

[Travis McGee]

I've got Morningstar's button on my desktop! Great site. Fast quotes and charts, and a pretty fair take on the market I think.

[A CA Guy]

Isn't the issue regarding gold that people now could be getting in at the top of a bubble?

It's never easy, is it?

[Grampa Dave]

There are good mutual fund companies like there are good Americans. We hope the world doesn't judge all of us by the actions the lunatic left, aka, the DemocRats.

[A CA Guy]

I think this is a criminal and not a political issue to be honest.

I am disturbed by all the criminal activity that is happening in attempts to meet or surpass expectations.

I guess the best way to handle this is to give 20 years at least to offenders who are doing this...after stripping them of their wealth of course!

[Grampa Dave]

Morningstar is really good with rear view mirrors re evaluating a Fund manager or the team. I use them everyday for that data.

The problem in today's world is Morningstar looks at what happened a month ago up to 5 to 10 yearss. Most of that data is irrelevant in today's world if it is over a year old. What is more important that the old history is, how is a fund doing lately back to a year compared to other funds in its category. If it is not beating the other funds in that category for specific periods going back to a year, it is probably not a good investment even if it has the MS 5 star rating.

Having said that, Morningstar has been on top this scandal, and has been on our side since day 1.

[Travis McGee]

It's never easy, but gold has a long way to go UP. The good thing about it is that it is unlikely to tank on a bad report, poor "earnings", or a denied patent! If you buy it now, set a mental stop loss point. If it goes down, say, 8% from the purchase point, dump it. But the beauty is that it's very unlikely to nose dive.

[Elliott Jackalope]

Yeah, right. Like the Wall Street crowd is EVER stripped of their wealth, or they EVER serve hard time. If you believe that, I've got some mountaintop property in Southern Florida to sell you. In case you have not figured it out yet, our entire financial system is a scam. It's kind of like a poker game, if you don't know who the chump at the table is, then you're it.

[Travis McGee]

I agree! They suit me now, because since 2000 I haven't been actively trading.

[Grampa Dave]

It will be a crummy Thanksgiving and Christmas for these crooks.

The worse are the ones who actually headed up or were CEO's for mutual funds, and they still were involved in these scams.

The best punishment will be when states, local government, corporations and individuals cashing out of the bad funds and rolling their money into legit funds. Putnam lost 12-14 billion $'s in fund rollovers and cashouts in just a couple of days.

These guys need criminal charges filed and civil charges filed against them. If they broke laws and are found guilty, put them in jail. Then sue them in criminal courts to remove their ill gotten money.

[Grampa Dave]

Your suggestion here is excellent advice for any of us.

"If you buy it now, set a mental stop loss point. If it goes down, say, 8% from the purchase point, dump it. But the beauty is that it's very unlikely to nose dive."

The best thing is to take it one step further, "Actually put a sell order if the gold, stock, fund fall to a certain level."

[Grampa Dave]

fyi

[A CA Guy]

Not the "crowd", the offenders who are proved to be criminal.

We step over the corporate veil to get funds for employees, the same way when people with fiduciary responsibilities use their positions for illegal gains, I say grab their money, including what they try and pass through various means to the immediate family.

Crime shouldn't pay is all I am saying and unless these kinds of people get slammed hard, the incentive for illegalities will remain.

A Anderson kind of paid a price, didn't it? On a personal level they should chase criminals and confiscate ill gotten wealth. Why not?

[Travis McGee]

I'd put a sell order lower, maybe 10%, in case you missed your mental stop. You don't want to get picked off just because your stock which was hovering around -6% went to -8.01% for a few minutes on a weird day, when you are following the chart and are watching its fluctuations closely. But hey, it's all a matter of style. I got out of the market 100% in March 2000 when I was down 8% overall. I sure didn't ride any losers to the bottom! But I also stopped paying attention, and missed a great last 6 months. Oh well.

[Elliott Jackalope]

If you or I steal a six-pack from the local qwikie-mart and get caught, we go to jail that very day. If some Wall Street swindler steals billions, he never sees the inside of a jail cell. One system for the elites, one system for the rest of us. It is the way of the world, it has always been that way. Anybody seen where Ken Lay is currently living? I rest my case.

[Grampa Dave]

I use the same rule. I rolled a few thou from my Fido 401k to my Fido IRA. Via the IRA, I would buy and sell QQQ, MDY and SPY with goals like a 12 to 15% increase with stop orders. So I had double sell orders. When I got a certain profit % I sold. Fortunately Bob Brinker warned us to get out of the market when you did and my sell orders save my bacon on some QQQ and MDY stocks.

I converted most of my 401k to Pimco Total Return which was great until this summer, rod the Ginny Mae bond funds for a while with the Pimco. I got back into Mutual funds after 9/11 and the ones I got into have been basically good for us up to now. That was when I realized that a Morningstar 5 star fund might have been great for the past 10 years. Then the manager or team had not idea of what to do in the current market.

I went to the leader of the category philosophy with some ties to the Morningstar principles, and it has served us well.

[staytrue]

T rowe price in Baltimore has a relatively clean reputation for low expenses and decent performance and has yet to be implicated in any of the scandals.

Since it is far from NYC and Boston, perhaps this was the insulation that has helped keep it clean.

Or maybe it is dirty too.

I happen to own 1 of the trow price funds and have zero connection to management.

[AmericaUnited]

But the beauty is that it's very unlikely to nose dive.

You must be a newbie to the gold market. Gold has many times "dived". For an example: Gold went from 387 to 322 in about two months in Feb/03-Apr-03. I've seen it drop $30 in a day.