Ask your average mutual fund investor what impact the scandal has had on them, and what do you think you will hear?

Outrage? Expletives? A sermon on how the fund industry should never have gotten into trouble in the first place?

Not exactly. Try more of a yawn.

A survey of mutual fund investors by Spectrem Group of Chicago, as well as personal interviews conducted with individual investors by Money Management Executive, indicate that most have a cursory sense of the scandal. Few have followed the blow-by-blow details or are particularly aware of the potential remedies that have been proposed by the Securities and Exchange Commission and Congress.

But what they do know is that their investments don't seem to have fared any the worse even if their mutual fund advisor was implicated.

The Spectrem Group study of 420 investors found that investors generally fell into three categories. "Wait and see" investors comprise the largest group, 69% of those polled. They are monitoring the situation, expect improved behavior and will likely give their funds a second chance. "Passive" investors, the next-largest group at 22% of those polled, perceive the scandal as nothing more than a back-office operations problem of little concern, unless their fund's performance should fall. Only 9% of respondents characterized themselves as "activists" who would participate in a class-action lawsuit or dump a fund implicated in the scandal.

Less than one-third of investors polled for the Spectrem Group survey said they had "some" knowledge of the current allegations of trading abuses within the fund industry, while 44% admitted to having "little" or "very little" knowledge. Forty-three percent of respondents said they were "concerned" or "very concerned."

What came across loud and clear was that investors have assumed that someone else is looking out for them, such as a plan sponsor or a financial adviser, said Ann Nahart, director of Spectrem Group. Moreover, the degree of concern is likely dependent upon the state of the stock market. "There might have been a higher level of concern had the market been worse," she said.

Of the scandal abuses that have emerged, fund advisors extending preferential treatment to certain investors or corporations seemed to be the most distasteful to investors, with 66% of those surveyed citing this as a concern.

Name Dropping

While the scandal has enveloped more than a few well-known fund companies, only 26% of investors could name a specific fund company that had been implicated and said they have formed a negative opinion of that firm, the Spectrem study found. The fund company most frequently cited was Putnam Investments, mentioned by 22% of participants, followed by Janus Capital and Strong Funds, with 10% of survey participants citing the latter two companies. Of curious note, investors also mistakenly dropped the names of Enron and Worldcom as among those implicated in this scandal, Nahart noted.

As for being knowledgeable about the series of reforms that the SEC and Congress have both been trying to hash out, by and large individual investors aren't well versed in the proposed regulations or how they would affect them or their funds' advisory companies.

"Eighty percent of my [assets] are in funds that have not been implicated in the scandal." said George Lehmberg, a mutual fund investor in Virginia Beach, Va. Lehmberg said he was generally concerned with both the late-trading and market-timing charges against some fund companies but believes the firms "have that under control."

However, like many investors, the advisor of one of Lehmberg's fund investments was embroiled early on. "I've had one fund advisor, Janus, that was implicated, but I couldn't see how it affected me," Lehmberg said. Still, that one Janus fund he held didn't perform well. "[The scandal] pushed me to sell to realize a tax loss," he added.

"Overall, I am disappointed because I thought that the mutual fund industry was out there protecting the little guy. Greed is everywhere," said Howard Freeland, an investor in Baltimore. Although Freeland has money invested in Janus, he didn't make any changes. "What they were doing was immoral, but I didn't see it as affecting how they were handling my money." However, Freeland admitted that he has been channeling more money into individual stocks instead of funds.

"Frankly, I have always thought that these guys were crooks," said Lorenzo Perez, a self-proclaimed speculative investor who frequently trades stocks and mutual funds. Perez, who lives in Miami, spent last year in Europe, and said he has only casually followed the industry scandal.

"No mutual fund company has ever gotten it through its head that we are not customers, we are owners," Perez said. He has one-third of his investments in Rydex Funds, a group that welcomes speculative investors.

"Frankly, they can steal all they want," Perez said. "I don't care if these guys are skimming 25% off the top, as long as I get my 10% return."

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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