While Wall Street ripped roariously with scandal after scandal in 2002, the fund giants appeared to sit sanguinely on the sidelines. Insiders, on the other hand, know that the mutual fund industry didn't quite get by without a few scrapes of its own.

The fund managers who owned large stakes in the likes of Enron, WorldCom, Tyco and Global Crossing, at the height of their phony glory - including Fidelity, Morgan Stanley, Oppenheimer, PBHG, and Van Kampen - have largely escaped public scrutiny for their misjudgments. All the while, pit bull regulators grabbed high-profile sell-side analysts, Jack Grubman of Salomon Smith Barney and Frank Quattrone of Credit Suisse, in their frothing jaws.

What about the flavor-of-the-month and gimmick funds that continued to pour out of the pipeline this year - gold, real estate, value and principal-protection now being "hot" areas? And what about the fund executives now saying investors helped pump up the dot-com craze and deserve some of the blame?

"We as investors, do have to bear some responsibility for not being more vigilant. If you read the headlines for the last decade, you see all the warning signs there," said Gus Sauter, managing director, quantitative equities, Vanguard. "It does come back to greed."

What's a Trillion?

After a third consecutive year of losses in the equity market, which have vaporized an estimated $8 trillion in gains, fund managers, while talking up diversification and bonds, have still continued to toe the equity-investing party line. And investors, for the most part, have bought it. The $6 trillion industry is down $1 trillion in total assets since the start of the bear, but net outflows this year will be a mere $40 billion.

Granted, investor confidence has been shaken, but the fund industry's arguments to believe in the market's 10% 70-year average gains, and investment firms' collective retirement-planning scare tactics have kept the industry well afloat.

Forget about the chad fiasco in the presidential election. A new fight is being waged at the fund proxy polls, and it's drawing the likes of AFL-CIO heavyweights. A growing groundswell of shareholder activists believes that by forcing fund complexes to reveal their $3.6 trillion worth of stock voting power to the general public, the quiet, venerable and otherwise neutral fund industry, will keep the Dennis Kozwolskis of the world in check.

Hiding behind the curtain, in fact, is something investors want fund companies to stop doing. Requiring funds to reveal their holdings once each quarter and their fees in clear dollars and cents, is a regulatory push that seems increasingly likely to pass - regardless of who is named to replace SEC Chairman Harvey Pitt.

And as long as our topic is the year's pitfalls, don't forget the personal scandals of the year, beginning with Mr. Pitt's own poor judgment, and startling resignation, when he tried to install a figurehead at the new Public Company Accounting Oversight Board. The fund industry even made it to the gossip columns, with a Franklin Templeton executive who allegedly beat his wife, and a self-proclaimed scion of Jack Dreyfus' fortune demanding that the fund titan prove his paternity through DNA testing.

And who would have predicted Bob Dole would move from promoting Viagra to also hawking annuities?

Let's not forget a Mutual Fund Market News front-page story that some are calling the headline of the year: "Consultants Call Morningstar Pricing Unfair."

How about the irony of fund managers, analysts and economists claiming throughout 2002 that the bear market had ended, while a number of leading fund complexes, including Oppenheimer and Legg Mason, were quietly filing to permit their funds to short the market?

Regardless of what happens in the mutual fund world in the year to come, one development of the past year that is certain to bear on the year ahead, and beyond, is the fact that the giant of the mutual fund investing public is beginning to waken.

Fund firms, you may have avoided the embarrassments that have befallen so many leading American corporations and financial titans during the past year, but investors are beginning to realize that, as the stewards of their vast retirement dreams, you are worth careful watching.

Be afraid. Be very afraid.

Roy Weitz is the publisher of www.FundAlarm.com, a Web site designed to provide insight into the inner workings of the fund industry, including ratings on underperforming funds and portfolio manager changes. Among other reports, Weitz broke the news on the recent dissolution of the Berger Funds.

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