Smarter Money: Stampeding Toward the Mutual Fund Exits

These Merrill (MER Quote) and Applied Micro (AMCC Quote) blow-ups couldn't happen at a worse time for America's mutual fund industry.

I think the public views mutual funds the way insurance companies view insurance consumers: We are all entitled to one bad quarter or one accident without any real repercussions, but put two back-to-back bad quarters together and the scrutiny goes way up. Now that these earnings shortfalls are coming with just days left in the quarter, I think that fund consumers are going to start bolting from loser funds, tax exemptions or not. Just as with insurance, you can't have two accidents back-to-back and expect that everything will be hunky-dory.

Is it right to bolt after two bad quarters? Yes, I think, all of last year was bad. That's too much of a pattern to stomach. Look for heavy withdrawals and no new money after people see their statements 10 days from now.

Random musings: One of the reasons the mutual funds get you their portfolio reviews so late is that the NASD Regulatory and Compliance rules often tie up communications with shareholders for four to six weeks. So the industry isn't always at fault.

Also, reader Mike H. has an explanation of why the hedge funds, like those run by Dan Benton, take a lot of heat in the conventional press while the mutual funds pretty much skate, despite the far greater impact those funds have on the public: How much money does Dan Benton (or any hedge fund manager) spend on advertising per year, or per month, with The Wall Street Journal? Zero, zippo, nada. OK, how much does Vanguard (or Fidelity, Janus, Scudder, etc.) spend per year (or per month, week or even day)? Mucho dinero! Face it, the conventional media will never seriously bite the hand that feeds them: advertising revenue. Every now and then they might take a nibble but not much more than that. When The Wall Street Journal, Barron's, Fortune, Forbes, etc., need examples of poor performance or mismanagement, it's usually hedge funds or obscure funds or fund companies that incur the wrath of the financial press. Given the sheer number of debacles that we have witnesses in the last year among mutual funds, you would think that we would be treated to some critical analysis of the industry. Won't happen. As long as the advertising dollars roll in, the media will choose to simply ignore this storyline. Vanguard, Fidelity and the other big advertisers of the fund industry are essentially untouchable.

I can't say I agree with Mike on all of this. Fortune, for example, has just hammered some underperforming funds. In general though, outside of our own regular coverage of this industry, I don't see much rigor in the coverage.