One in an occasional series
While mutual funds have struggled in the stock and bond markets this year, they've had an even harder time in the court of public opinion.
Through the late 1980s and early 1990s, the funds were routinely hailed as a booming business that brought a valuable service to investors.
Now, in much of what is said and written about them, they are being portrayed as the financial bad guys of 1994.
In the words of the National Association of Securities Administrators, a group of state regulators: "Before this year, the industry grew by leaps and bounds but managed to stay largely non-controversial, attracting little attention from Capitol Hill and the news media.
"That calm was shattered this year with a number of serious concerns raised about bank sales of mutual funds, personal trading of fund managers and the little-known presence of derivatives in many of the funds."
Beneath all this smoke, it must be said, there hasn't been much detectable fire. Certainly, nothing has emerged to date that could qualify as a mutual fund "scandal," not even a little one.
The dismissal last winter of a prominent fund manager for allegedly failing to comply with his employer's reporting requirements helped spark an inquiry into industrywide practices on personal trading.
But after the investigation was completed, chairman Arthur Levitt of the Securities and Exchange Commission reported that there was no widespread problem involving trading abuses.
A leading congressional overseer of the financial world, Rep. Edward Markey, D-Mass., went so far as to commend the funds for keeping their noses clean.
The Investment Company Institute, the funds' biggest trade association, at the same time has been asserting that "there is no widespread or systemic problem in the use of derivatives by mutual funds."
Derivatives, specialized securities whose value is often linked closely to interest rates, have been implicated in some highly publicized cases of funds that ran into trouble in recent months.
"Most have involved money market funds where the SEC already has taken steps to clarify the types of instruments that are eligible for money market portfolios _ steps that have been fully supported by the industry," said Matthew Fink, the ICI's president.
Another great clamor has focused on fund shares sold in banks, and a purported lack of emphasis on the risks involved in those funds. This has led to calls for required warnings, in bigger and bolder type than presently mandated, that funds are not covered by the Federal Deposit Insurance Corp.
"If funds have to be presented to customers with the FDIC disclaimer, why not mandate all securities be sold the same way?" editorialized the trade publication Mutual Fund Market News. "Imagine a stockbroker saying to an investor, "first and foremost, shares in IBM are not insured by the government."'
Sooner or later, fund investors have to bear the burden of risks they take knowingly and voluntarily, as long as those risks are clearly and fully disclosed. It seems dubious, for instance, to hold money market funds rigidly to the promise of keeping net asset values at a constant $1 if that promise was never made and, in fact, was specifically disclaimed.
But whether the fund industry has been unjustly maligned or not, it's a good bet that the scrutiny is going to continue, if not intensify, for the foreseeable future.
Even if some of the accusations leveled at them are poorly thought out or just plain wrong, the funds have attained a degree of public trust that makes them fair game for constant questioning and challenge.
As good as their record may be, it is by no means perfect.
As Levitt of the SEC said at a recent industry gathering: "Disclosure has been weak and deficient in the fund business.
"There are too many fund names that don't represent what the fund actually invests in. All of us have got to do a better job to protect consumers."