NEW YORK -- Some fund investors have lost that loving feeling.

The approval rating for the mutual fund industry has slipped in the past few years, as the market-timing and late-trading scandals coupled with a prolonged bear market have adversely impacted shareholder sentiment, according to the head of the Investment Company Institute.

Speaking at a media briefing here on Wednesday, the trade association's newly elected President Paul Schott Stevens unveiled for the first time the results of the ICI's annual tracking survey designed to gauge the investing public's perception of the fund business.

Tracked internally since 1997 as part of an ongoing research effort, the data is based on information provided by a cross-section of the roughly 92 million mutual fund shareholders nationwide who are "familiar with mutual fund companies."

This year's study, based on telephone interviews with 1,110 fund shareholders, showed that the approval rating is up slightly in 2004 with 72% of fund owners saying they had a "favorable" or "somewhat favorable" view of the industry. That compares with a 71% approval rating in 2003.

At its height in 2000, shareholder approval stood at 84%, just prior to the collapse of the stock market. Historically, favorability ratings have mirrored the performance of the market, which also peaked in 2000. Essentially, investors are most satisfied when returns on their investment are strong and market conditions are favorable and vice versa. That's just the nature of the beast.

However, this year serves as somewhat of an anomaly in that the market rebound has not been reflected by improved shareholder sentiment. While the number of folks who have a somewhat favorable view of mutual funds has remained relatively the same as in 1997 and 2000, those with a very favorable impression has dropped from 28% at its peak to 16% this year.

"We've lost some strength of feeling from our core contributors," Stevens told reporters in attendance. "In the past few years, it appears that the bear market has adversely affected shareholders' views of funds and that the recent scandals have had an additional impact."

Stevens attributed the recent loss of confidence to the "uniquely bruising experience" the industry has endured since New York Attorney General Eliot Spitzer announced his investigation into mutual fund trading practices in Sept. 2003, which set off a chain of events that transformed "hubris" into humility, Stevens said.

More than three-quarters of mutual fund investors were aware of the trading scandal at the time the poll was conducted in June, Stevens explained. Within that universe, 56% said they had a lower opinion of the mutual fund industry as a result, while 44% said it had no effect on their views, he said.

Despite all that has transpired since that momentous event, Stevens maintained that the industry has held up very well. In fact, he said that favorability remains "generally high," noting that only banks can boast a higher approval rating this year. Credit card companies, insurers, mortgage lenders and brokerage houses all trailed mutual funds in terms of favorability. The survey does not, however, account for disaffected investors who may have dumped fund shares as a result of the scandal.

Another sign of the industry's perseverance is the $244 billion in new cash that came in the door in the 12 months ending May 2004, its highest inflow since 1997, Stevens noted. That represents a vast improvement from the $78 billion garnered in 2003.

The survey found that fund performance was the most important factor in how shareholders view the industry, followed by personal experience with the company, current market events and professional advice. While conceding that funds have no control over swings in the market, Stevens pointed out that an investor's personal experience is something that mutual fund companies can control.

With respect to choosing the right mutual fund, more than half the respondents said that a fund company's reputation was the most crucial factor in making a decision. In addition, the respondents cited investment diversification and number of fund choices as being nearly as important. Fees and expenses were also given significant consideration. Daily pricing was the least of their concerns, suggesting that most fund shareholders are in it for the long haul, Stevens said.

Going forward, the ICI plans to publish the results of its tracking survey on an annual basis.

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