Mutual fund shareholder sentiment was on the rise again in 2006, according to a survey from the Investment Company Institute of Washington, and some experts say it's proof that the industry is making strides at reclaiming its reputation as a noble custodian of Americans' precious investment dollars.
"As players in the financial services industry go today, I'll trust my money to a mutual fund manager before any other," said Mercer Bullard, a shareholder activist and assistant professor of law at the University of Mississippi in Oxford.
The road back from the industry's low point in 2003, when the shenanigans of a handful of major mutual funds and rapacious hedge funds like Canary Capital Partners was first exposed by New York Attorney General Eliot Spitzer, has been a rocky one. But according to the ICI, mutual funds' favorability rating rose for the second straight year in 2005, driven largely by the performance of the stock market. After reaching its nadir of 71% in 2003, the favorability measure rose to 72% in 2004 and 75% in 2005.
For perspective, the 2005 fund favorability rating is very close to fund shareholders' sentiments toward banks, and higher than their opinions of brokerage firms, insurance companies and credit card companies, the ICI research shows. The ICI polled 3,000 households.
Unfortunately, while overall favorability of mutual funds has increased, the number of shareholders who have a "very" favorable view of fund companies fell to 15% in 2005. During the height of the bull market in 1999, the same year Spitzer took office and one year before the tech crash, a record 29% of polled investors had a very favorable view of mutual funds.
The number of mutual fund shareholders with a "somewhat" favorable impression of mutual funds is also on the rise. In 2005 it reached an eight-year high of 60%. By contrast, the ICI said, shareholders with a "very" unfavorable rating of mutual funds have remained steady at 1% to 2%.
"Over time, it is clear that overall shareholder sentiment and favorability is closely tied with stock market performance," ICI officials said in a statement. The S&P 500, the ICI noted in its research, peaked in 2000, declined between 2001 and 2003, and rebounded in 2004 and 2005.
Officials said the drop in the very favorable element of the survey is "more or less statistically insignificant."
The ICI research also shows that shareholders own mutual funds for a variety of reasons, most prominently based on the reputation of the fund complex, fund performance and diversification, followed by fees and expenses. Most investors also expressed confidence that mutual funds would help them meet their investing goals.
In a trend that might reinforce the ICI's findings, two fund complexes that figured prominently in the scandal have been gaining new momentum in recent months. Citing quiet period rules, officials with Janus Capital would not discuss the company's fourth quarter performance. But Shelley Peterson, a spokeswoman for the Denver-based fund group, said that as of Sept. 30, its assets under management stood at $139 billion, an increase of 7% versus the previous quarter and a five-year high. That new money also marked the first positive net flows for Janus since the scandal broke in 2003.
While that number pales in comparison to the $325 billion the growth shop had under management in early 2000, it represents quite a turnaround for a company that lost half its assets in the tech crash and then witnessed investors flee in droves because of its role in the scandal.
To regain investor confidence, the firm paid $226 million to settle the market-timing charges, shuffled its senior management, bolstered its research team and ordered its fund skippers to put their own money in the portfolios they manage. Janus also took a page from the hedge fund playbook and linked its managers' pay to fund performance.
Peterson points to two additional developments: a favorable environment in the capital markets and changes to Janus' sales strategy, which previously targeted the retail investor directly and almost exclusively.
"Performance across the board has been strong at Janus, by and large," she said. "We've also concentrated our efforts largely in the adviser and institutional areas. We think that provides us with the greatest growth opportunities. We believe we're headed in the right direction, and if the current trend continues, we'll continue to be successful."
It could be argued that Putnam Investments is on the rebound, too. While outflows from retail and institutional investors continue - the Boston shop reported redemptions of $8.5 billion in the third quarter - Putnam President and CEO Charles "Ed" Haldeman is optimistic. Installed after Putnam's role in the scandal broke, Haldeman pledged that the fund shop would set the industry standard for integrity, performance and customer service. He also recently said that he expects outflows to cease this year and that the company did "a good job" earning back its reputation, but that it's been "underappreciated" in the marketplace.
Rob Feckner, investment committee chair for the California Public Employees' Retirement System, the nation's third-largest public pension fund and a key Putnam client, agrees with Haldeman. "Putnam has turned itself around, making a commitment to regain the trust of its investors," Feckner said. "We hope other mutual fund companies will follow Putnam's lead."
As examples of its efforts to regain favorability, company spokeswoman Laura McNamara cited its voluntary initiatives to limit fund expenses, which saved Putnam investors $35 million in 2004; a decision to bring all of its funds under the industry average expense ratio for their peer groups; and a decision to reduce front-end sales charges on Class A shares.
Putnam also took voluntary steps to enhance disclosure, paid $193.5 million in fines to state and Federal regulators, and reimbursed $108 million to investors hurt by market timing and short-term trading in its funds.
But Roy Weitz, founder of the fund watchdog Fundalarm.com in Tarzana, Calif., is skeptical whether firms like Janus and Putnam will regain widespread investor confidence anytime soon.
"It will take a long time for knowledgeable investors not to think of the scandal when they hear the names Janus and Putnam. It's to the point where it's almost become conventional wisdom," he said.
"Perhaps worse yet, is the fact that the average investor probably couldn't tell you exactly what happened and why and whether the problems have been fixed," he said, alluding to the point that in many cases, market timers ignored repeated warnings from funds that prohibited the practice, while those that were barred from a fund simply found other ways to cheat the system.
More broadly speaking, however, Weitz agrees that shareholders are viewing mutual funds in a more favorable light. He cites activity on his investor discussion board, which is at an all-time high. "It's a sign of investor interest. My feeling is that we're on the cusp of something new," he explained. "The energy thing has played out and I don't know what's coming next, but I get the sense that people think things are going to get better."
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