If there's one lesson money managers should glean on the first anniversary of the mutual-fund industry scandal, it's this: Don't get caught with your fiduciary pants down when your investment performance is slumping.
The scandal erupted last September, when Eliot Spitzer announced the first of many regulatory settlements for market timing and late trading. The Massachusetts attorney general and the Securities and Exchange Commission entered the fray quickly thereafter. Growth equity managers, whose fortunes dipped after March 2000 when the late '90's stock market boom went bust, have suffered the most.
"For most of the firms that got nailed, the wheels had already come off the bus from an investment standpoint," said Geoffrey Bobroff, president of mutual fund consultant Bobroff Associates Inc., East Greenwich, Conn.
An executive with one scandal-tarred firm agreed: A money manager with a strong sales team and decent performance numbers would have had a better chance of keeping its client base intact, he said. With weak performance, clients will "just pull the plug."
And so they did. Between Aug. 31, 2003, and July 31, 2004, institutional and retail clients pulled $156 billion from the 21 firms cited by regulators, said Donald L. Cassidy, the senior research analyst following the scandal's fallout for Lipper Inc., New York.
The outflows have hit growth managers exceptionally hard, including Putnam Investments Inc., Boston; Janus Capital Group, Denver; Strong Capital Management Inc., Menomonee Falls, Wis.; and Pilgrim Baxter & Associates Ltd., Wayne, Pa.