Caught in a storm: Black Enterprise offers 90 selections that might be a silver lining in the dark clouds of the recent mutual fund scandals.

On the surface, 2003 was an excellent year for mutual funds. Virtually every fund category posted gains--the first time that's happened since 1996. The fund categories that held the most money (those emphasizing large-cap domestic stocks) averaged gains Of 28%. However, a stream of scandals rocked the industry in the second half of the year, leading to high-profile resignations, costly settlements with regulators, and huge cash outflows from certain fund families.

What was all the fuss about? In essence, some fund families allowed selected investors to benefit from market timing and niter hours trading--taking advantage of loopholes in the mutual fund rides--to make a quick buck. (See "How Do the Mutual Fund Scandals Affect You?" Moneywise, Feb. 2004 or www.blackenterprise.com/ExclusivesEKOpen.asp?id=649.) Ivory Johnson, who is a chartered financial consultant and founder of Delancey & Associates L.L.C. in Annapolis, Maryland, says, "Those profits diluted the returns of long-term investors and increased fund expenses."

But the actual losses may not have been so great. Marc Singer, CFP, a partner with Singer Xenos Wealth Management in Coral Gables, Florida, estimates that an investor with $20,000 in a mutual fund might have lost only $20 or $30 to such practices. Christine Benz, associate director of fired analysis at Morningstar Inc., agrees: "It's tree that the dollar amounts were small," she says. "What's more, this type of improper trading probably has been stopped. However, investors in fired families that have been named in serious trading abuses should think hard about making changes."

Morningstar, the Chicago-based mutual fund research firm, has recommended that shareholders consider selling funds from Alger, Alliance, Bank One, Bank of America's Nations Funds, Invesco, Janus, PBHG, and Strong. What about Putnam, which has been charged with misconduct and has suffered billions of dollars of investor outflows? "Putnam's new management has a history of strengthening mutual fund companies," says Benz. "We're not saying sell, but we have told investors not to put any more money into Putnam funds, the same as we're recommending for funds from Federated Investors."

ENCOURAGING WORDS

John Baker, for one, is happy that his funds aren't on that list. "The news has been worrisome," says Baker, 37, a manager with a high-tech company in Colorado Springs, Colorado. "When we'd hear about it on TV, my wife, Regina, would ask me, 'How are we doing?' From what we heard, some short-term traders were being given an edge at the expense of long-term investors." The Bakers, who invest fur the long term, felt uneasy. "We checked with our financial planner," says Baker. "He assured us that the funds we held were from reputable companies like American Funds, so we feel better about our investments." The Bakers' funds include Capital Income Builder (CAIBX), American Balanced Fund (ABALX), and Capital World Growth and Income Fund (CWGIX).

"These funds are defensive; they don't make as much money as some funds during bull markets. But they don't decline as much either when the stock market is weak," explains Richard J. Peace, CFP, the Bakers' financial planner. "In fact, these funds have performed well over the past decade."

The Bakers also have some money in Sun America focused portfolios. "These are mutual funds that ask three different managers to name their 10 best ideas in terms of stocks," says Peace. "They tend to be more aggressive than American Funds. Again, the company has a good reputation and performance has been strong." Peace says he is satisfied with the ethical behavior of these families, as he is with Van Kampen funds, which are held by some of his other clients.

RESPONSIBILITY KNOCKS

Just as Baker is comfortable with the fund families he holds, so is Charles M. Adams, 42, president of Adams Communications & Engineering Technology, an IT consulting firm in Waldorf, Maryland. "All the bad news doesn't scare me unless it affects my funds," says Adams. "So far that hasn't been the case. I do most of my investing through my company's 401(k) plan, which has hinds such as Fidelity Magellan (FMAGX) and Fidelity Dividend Growth (FDGFX). Fidelity hasn't been named in these scandals."

Ivory Johnson, Adams' financial plan net, concurs that Fidelity and its funds have not been implicated in the ongoing scandals. "Charles also holds some Vanguard funds, and Vanguard has an excellent reputation," says Johnson. "I'd be surprised if it's found out that those companies permitted improper trading." Johnson does feel, however, that the mutual fund scandals have presented business owners, such as Adams, with other burdens to bear. "If you sponsor a retirement plan that includes employees," says Johnson, "'you have a fiduciary responsibility to them. Your employees might sue you in the future if their retirement accounts don't do well, and having funds from families that have been named in scandals could hurt your defense."

If that's the case, what steps should business owners take to reduce this risk? "Bring in a reputable financial professional," says Johnson. "This adviser can look at the funds in your plan and attest--on paper--that they appear to be well-managed and from respected fund families. If necessary, your adviser can recommend new funds to replace ones that should be removed from your plan. An advisor also can determine whether you're participating in a good mix of funds and can help your employees put together well balanced portfolios."

LEARNING CURVE

Looking at this issue from the employee's point of view is Carl E. Peoples, 38, a manager with Wachovia Wealth Management in Atlanta. "I do most of my investing through my employer's 401(k) plan," he says. "I expect [my employer] to review all the funds now in the plan and to replace any that are inappropriate for my investing."

Within his 401(k) plan, says Peoples, most of his assets are in Dodge & Cox Stock Fund (DODGX), "This fund has done very well. That family hasn't been charged with anything, as far as I know."

Osmond Baptist, a certified financial planner in Decatur, Georgia, who advises Peoples, says, "I don't like to see clients have too much of their portfolio in one stock or one fund. For 2004, I'll try to convince Carl to spread his investments around to some other funds." Peoples, in the meanwhile, has another issue to discuss with Baptist at their next meeting. "Our children's 529 college savings accounts are in a plan run by Putnam, which is a matter of concern," he says. "When we sit down together, I'll ask [Osmond] about moving to another 529 plan."

Whether you hold funds from dysfunctional families in a 529 plan, a retirement plan, or a personal account, there are reasons to bail out as well as reasons to stay put. Here's why you might want to stay:

* The fund might have been a top performer. For example, Strong Advisor Small Cap Value Fund (SSMVX) has returned more than 22% per year fur the past five years, among the best of all mutual funds. If you currently hold this fund (which is closed to new investors), would you want to pull your money out and try to find another small-cap fired that will perform as well, just because the parent company has had problems?

* You might owe taxes. Leaving a fund from which you gained a profit will trigger a capital gains tax, assuming it's not in a retirement account, says Baptist: "If you've owned the fund less than a year, you'll have a short-term gain taxed at your highest rate." If you move out of a top fund, such as the Strong entry mentioned above, the tax bill could be enormous.

* You might owe fees. "So me investors don't realize they own B shares of a mutual fund," says Baptist. "If that's the case, you might owe a deferred sales charge if you move to another fund family in less than two years time."

There may also be fees to pay and paperwork to fill out if you want to move from one 529 savings plan to another. "Unless there is a strong desire to switch right away, I may advise investors to wait for a while," says Peace. "I'll keep an eye on events and let clients know if they should act."

Here's why you might want to switch:

* Possible manager distraction: "If the managers at your fund are thinking about defending themselves against lawsuits," says Johnson, "they're not thinking about picking the best stocks for you."

* Possible manager departures: Top-performing managers at tarnished families may get better offers elsewhere. "It's probably not much fun working for some [scandal-ridden] companies these days," says Benz. "We've seen manager defections from some fund families."

* Greater caution, lower returns: Money is already flowing out of families named in the scandals. "If managers expect heavy redemptions, they may hold more cash than they normally do," says Johnson. Low-yielding cash is likely to reduce returns for long-term investors. Alternatively, if the manager stays in stocks but eventually has to sell some holdings to meet redemptions, there's a chance those stock prices will be depressed by the selling pressure.

* Fewer investors, higher expenses: "There may be a 'run on the bank' at accused fund families," says Baptist. "If that happens, remaining investors might have to carry a greater share of the fund's expenses."

* Repeat offenses: Singer is advising clients to change 401(k) selections in some cases and move away from fund families that have been charged with improper behavior. "Everybody is entitled to a few mistakes," he says, "especially if steps are taken to correct them. However, repeated errors may be a sign that the fund company is not well-managed. It may lack good controls. There are many fund families to choose from, so why invest with a company that has misbehaved frequently?"

If the reasons for switching seem convincing, you must next decide where to reinvest. There's nut much point in moving from a confessed wrongdoer to another fund family that is soon revealed to be the latest target of regulators. "There's no way to know for certain where problems will be," says Don Cassidy, senior research analyst at Lipper Inc., a mutual fund research firm. "However, we have found two factors to be good forecasters of funds [involved in] improper trading."

First, says Cassidy, mutual fund investors can compare the number of purchases and redemptions a fund has undergone. Both numbers can be found in the fund's annual report or proxy statement. If those two numbers are about equal, it may be a sign of a lot of in-and-out, round-trip activity.

The second number to look at is what Cassidy calls the churn ratio--the relationship of a fund's redemptions in a given year to its average net assets, "A fund with a billion dollars of net assets might expect to have $,100 million worth of redemptions in a year, for a 40% ratio," he says. "Ira fund has $3 billion or $4 billion in redemptions, for a 300% or 400% ratio, that's another sign of short-term activity, From our calculations, the fund families that have been charged with serious misbehavior are among those ranking highest on those two factors."

Such ratios may or may not be signs of improper behavior. "They do indicate high trading costs. And, over time, high costs work against fund investors." says Cassidy. "If you're looking for top-performing funds from well-run companies, you might start with those that pay attention to people living within a family budget.

B.E.'S TOP MUTUAL FUND PERFORMERS

Top funds in each category, single share class, retail only, by 3-year
return

                                                         1-YR
CATEGORY        FUND NAME                    TICKER    RETURN %

                Fidelity Sel Leisure         FDLSX      41.85
Large           Fidelity Capital Apprec      FDCAX      51.68
Growth          Marsico 21st Century         MXXIX      48.79
                Jensen                       JENSX      16.58
                Chesapeake Core Growth       CHCGX      42.42

                Meridian Growth              MERDX      47.90
Mid-Cap         First Focus Gr Opp Ins       FOGRX      33.41
Growth          Papp Small & Mid-Cap Gro     PAPPX      30.18
                Accessor Sm to Mid Adv       ASMCX      44.06
                Westcore Midco Growth        WTMGX      41.19

                1st Source Special Eqty      FMSPX      41.08
Small           Baron Small Cap              BSCFX      38.82
Growth          Henlopen                     HENLX      64.98
                Fidelity Small Cap Stock     FSLCX      45.04
                Oberweis Emerging Growth     OBEGX      67.70

                Matrix Advisors Value        MAVFX      44.59
                Thompson Plumb Growth        THPGX      31.86
Large Blend     Mairs & Power Growth         MPGFX      27.67
                Parnassus Equity Inc         PRBLX      15.69
                Neuberger Ber Soc Res In     NBSRX      34.48

                Hussman Strategic Growth     HSGFX      21.09
Mid-Cap         Matthew 25                   MXXVX      32.05
Blend           ICON Leis&Consum Staples     ICLEX      27.33
                TCW Galileo Val Opport N     TGVNX      48.35
                FMI Common Stock             FMIMX      24.07

                CGM Focus                    CGMFX      66.46
                Babson Enterprise            BABEX      50.64
Small Blend     Safeco Small-Cap Value I     SFSCX      43.10
                ABN AMRO/TAMRO Sm Cap N      ATASX      56.86
                Hennessy Cornerstone Gr      HFCGX      45.82

                Memorial Value Eq Inst       MVEIX      33.76
                Auxier Focus                 AUXFX      26.75
Large Value     Oakmark I                    OAKMX      25.30
                Masters' Select Value        MSVFX      32.42
                PIMCO PEA Value D            PVLDX      43.99

                Yacktman Focused             YAFFX      31.79
Mid-Cap         Yacktman                     YACKX      26.75
Value           Fidelity Sel Constr&Hous     FSHOX      44.09
                T. Rowe Price Mid Val        TRMCX      39.00
                Marshall Mid-Cap Val Inv     MRVEX      35.87

                Heartland Value Plus         HRVIX      53.56
                Royce Special Equity         RYSEX      27.64
Small Value     Berwyn                       BERWX      50.01
                American AAdv SmCpVI Pln     AVPAX      51.28
                Delafield                    DEFIX      40.13

                Oakmark Global I             OAKGX      48.98
                Polaris Global Value         PGVFX      47.06
World Stock     Pearl Total Return           PFTRX      40.02
                Fidelity Worldwide           FWWFX      38.41
                Portfolio 21                 PORTX      32.68

                AmCent Target 2010 Inv       BTTNX       3.19
Long            AmCent Target 2015 Inv       BTFTX       3.96
Government      Vanguard Long-Tm US Try      VUSTX       2.68
                AmCent Target 2020 Inv       BTTTX       3.52
                Wasatch-Hoisington US Tr     WHOSX       1.31

                PIMCO Real Ret D             PRRDX       8.03
Intermediate    Vanguard Infl-Prot Secs      VIPSX       8.00
Government      AmCent Inf-Adj Bond Inv      ACITX       7.27
                Vanguard Int-Tm US Trs       VFITX       2.37
                PIMCO Total Ret Mtg D        PTMDX       3.80

                AmCent Target 2005 Inv       BTFIX       2.17
Short           Managers Intern Dur Gov      MGIDX       3.40
Government      Northern U.S. Government     NOUGX       1.77
                Marshall Govt Inc Inv        MRGIX       3.08
                Vanguard Short-Tm Trs        VFISX       2.38

                Oakmark Intl Small Cap I     OAKEX      52.41
Foreign         Tocqueville Intl Value       TIVFX      54.79
Stock           Fidelity Canada              FICDX      51.91
                BlackRock Intl Opp Instl     BISIX      49.29
                Oakmark International I      OAKIX      38.04

                Managers Bond                MGFIX      10.77
Corporate       Vanguard Long-Tm Corp Bd     VWESX       6.26
Bonds           Parnassus Fixed-Inc          PRFIX       5.30
                Columbia Income 2            SRINX      11.97
                Vanguard LongTm Bd Idx       VBLTX       5.50

                Harris Ins Tax-Ex Bond N     HXBAX       5.55
Muni            Eaton Vance Muni Bd I        EVMBX       7.38
National        Safeco Municipal Bond Inv    SFCOX       5.95
                TIAA-CREF Tax-Exempt Bd      TCTEX       5.87
                Fidelity Adv Muni Inc I      FMPIX       5.84

                FPA Crescent                 FPACX      26.15
Domestic        Oakmark Equity & Inc I       OAKBX      23.21
Balanced        Greenspring                  GRSPX      31.34
FundS           Dodge & Cox Balanced         DODBX      24.44
                Franklin Income A            FKINX      30.96

                CitiFunds Inst Liq Res       CILXX       1.02
Money           Harris Money Market Inst     HACXX       1.10
Markets         Nations Cash Resrvs Cap      CPMXX       1.09
                SEI Daily Money Market A     TCMXX       1.07
                Nations Govt Resrvs Cap      CGCXX       1.04

                                         MINIMUM
                 3-YR        5-YR        INITIAL
CATEGORY        RETURN %    RETURN %    PURCHASE        PHONE

                  4.92        2.99        $2,500    800-544-8888
Large             3.35        5.69         2,500    800-544-8888
Growth            2.23          NA         2,500    888-860-8686
                  1.26        7.78         2,500    800-992-4144
                 -1.84        8.23         2,500    800-430-3863

                 11.73       15.17         1,000    800-446-6662
Mid-Cap           4.28        6.38           500    800-662-4203
Growth            2.46        9.81         5,000    800-421-4004
                  1.81        1.89         5,000    800-882-9612
                  1.23        6.45         1,000    800-392-2673

                  9.80       11.68         1,000    800-766-8938
Small             9.67       13.19         2,000    800-992-2766
Growth            9.57       11.68         2,000    866-880-0032
                  9.17       15.73         2,500    800-544-8888
                  8.48       11.80         1,000    800-245-7311

                  8.79       13.05           500    800-366-6223
                  7.73       10.83         2,500    800-999-0887
Large Blend       7.69       11.13         2,500    800-304-7404
                  7.01        9.86         2,000    800-999-3505
                  3.88        3.62         1,000    800-877-9700

                 16.55          NA         1,000    800-487-7626
Mid-Cap          12.98        8.60         1,000    888-625-3863
Blend            12.87        9.45         1,000    800-764-0442
                 12.71          NA         2,000    800-386-3829
                 11.53       11.96         1,000    800-811-5311

                 26.42       27.53         2,500    800-345-4048
                 23.51       14.46         1,000    800-422-2766
Small Blend      17.63       11.42         2,500    800-624-5711
                 16.57          NA         2,500    800-992-8151
                 15.93       17.71         2,500    800-966-4354

                 10.22        6.43         1,000    888-263-5593
                 10.00          NA         2,000    877-328-9437
Large Value       8.26        4.89         1,000    800-625-6275
                  7.61          NA         5,000    800-960-0188
                  7.51       11.02         5,000    888-877-4626

                 21.08        8.09         2,500    800-525-8258
Mid-Cap          20.98       10.79         2,500    800-525-8258
Value            16.52        8.54         2,500    800-544-8888
                 13.76       13.35         2,500    800-638-5660
                 13.62       12.80         1,000    800-236-8560

                 25.80       13.04         1,000    800-432-7856
                 24.39       15.13         2,000    800-221-4268
Small Value      21.67       11.90         3,000    800-992-6757
                 21.46          NA         2,500    800-388-3344
                 19.68       16.19         5,000    800-221-3079

                 20.52          NA        $1,000    800-625-6275
                 15.99       11.36         2,500    888-263-5594
World Stock       8.82       10.69         1,000    866-747-9030
                  1.76        4.86         2,500    800-544-8888
                  0.42          NA         5,000    877-351-4115

                  8.37        6.59         2,500    800-345-2021
Long              8.27        6.54         2,500    800-345-2021
Government        7.71        6.44         3,000    800-662-7447
                  7.39        5.73         2,500    800-345-2021
                  6.80        5.43         2,000    800-551-1700

                 10.87       10.15         5,000    888-877-4626
Intermediate     10.70          NA         3,000    800-662-7447
Government        9.82        8.55         2,500    800-345-2021
                  7.91        6.69         3,000    800-662-7447
                  7.43        7.17         5,000    888-877-4626

                  6.89        5.43         2,500    800-345-2021
Short             6.71        6.14         2,000    800-835-3879
Government        6.28        5.69         2,500    800-595-9111
                  6.03        5.60         1,000    800-236-8560
                  6.03        5.73         3,000    800-662-7447

                 17.78       18.02         1,000    800-625-6275
Foreign          12.32        8.32         1,000    800-697-3863
Stock            19.54       15.71         2,500    800-544-8888
                  6.24       22.62         5,000    800-441-7762
                  6.23       13.47         1,000    800-625-6275

                 10.46        8.86         2,000    800-835-3879
Corporate         9.65        6.68         3,000    800-662-7447
Bonds             9.56        5.59         2,000    800-999-3505
                  9.40        7.81         1,000    800-338-2550
                  9.28        7.00         3,000    800-662-7447

                  7.45        6.48         1,000    800-982-8782
Muni              7.44        5.54         1,000    800-225-6265
National          7.16        5.67         2,500    800-624-5711
                  7.16          NA         2,500    800-223-1200
                  7.00        5.96         2,500    800-221-5207

                 21.22       11.57         1,500    800-982-4372
Domestic         12.47       12.98         1,000    800-625-6275
Balanced         10.82       10.07         2,000    800-366-3863
FundS             9.95       11.39         2,500    800-621-3979
                  9.26        9.32         1,000    800-342-5236

                  2.38        3.75      1,000,000    800-721-1899
Money             2.37        3.75        250,000    800-982-8782
Markets           2.36        3.74      1,000,000    800-321-7854
                  2.26        3.66        100,000    800-342-5734
                  2.24        3.60      1,000,000    800-321-7854

SOURCE: MORNINGSTAR INC. MORNINGSTAR MAKES EVERY EFFORT TO ENSURE
ACCURACY OF THIS DATA BUT CANNOT GUARANTEE COMPLETENESS AND ACCURACY.
DATA THROUGH 12/31/03.