SEC fixes for abuses in mutuals applauded.

Byline: Edward Russo The Register-Guard

CORRECTION (ran 12/12/03): University of Oregon Law Professor Judd Sneirson said allowing some, but not other, mutual fund investors to engage in market timing, or short-term trades, may be a breach of fiduciary duty by mutual fund companies that could give rise to lawsuits by shareholders. Sneirson was misquoted on page A6 in a Dec. 4 article about mutual fund scandals.

CORRECTION (ran 12/05/03): Frequent mutual fund traders who use market timing techniques have taken an estimated $5 billion in profits from mutual fund investors. A Thursday page A1 article had an incorrect description of the $5 billion.

Like millions of investors, Richard Meltebeke of Eugene is wondering what to do about his mutual fund investments.

The profit-sharing plan for the Eugene dentist and his six employees is invested in mutual funds at a time when scandals have shaken public confidence in the popular type of investment.

More than a dozen fund firms have come under scrutiny in recent months for a variety of alleged misconduct, including illegal after-hours trading and short-term buying and selling that diluted the value of investments by long-term share- holders.

"I'm increasingly concerned about the validity of mutual funds being a desirable way to participate in the U.S. stock market," Meltebeke said.

Wednesday night, he and other investors listened to recommendations by a panel of University of Oregon professors to curb the abuses, as well as practical investment advice.

Earlier Wednesday, the federal Securities and Exchange Commission issued proposals to prevent illegal and unethical behavior, and to restore confidence, including curbs on after-hours trading and greater disclosure to investors.

The professors praised the SEC proposals but said other reforms are needed.

Finance professor John Chalmers said mutual funds should change the way they determine the price of their shares. By doing so, the funds could end the practice of so-called "market timers" who profit on the short-term movements in stock prices with quick "in and out" trading of shares.

"Get the price right so the market timers will have no reason to stick around," Chalmers said.

Short-term market timing of mutual funds cuts into returns for ordinary investors, partly because all the rapid trading rings up higher expenses, which are spread evenly among all shareholders.

Market timing is not illegal, but allowing some investors to do it, as is alleged in most of the fund scandals, and not others is misrepresentation and could give rise to class action lawsuits by shareholders, UO law professor Judd Sneirson said.

Finance professor Woodrow Johnson said mutual funds should impose higher costs on frequent traders and consider limits on trades, to keep costs low. "If someone trades once a day, that hurts you," the long-term investor, Johnson said.

Mutual funds have become extremely popular among Americans. In 1980, for example, just 6 percent of U.S. households had money in such funds, but that figure has grown to more than 50 percent today.

"If you polled two people on the street, on average, one of them would be invested in mutual funds," finance professor Jon Reuter said.

The 1 1/2 hour presentation took place in a crowded lecture hall in the new Lillis Business Complex. The Lundquist College of Business sponsored the talk to help investors and others better understand the events that have tarnished the mutual fund industry.

Among other things, the finance professors urged people to invest in index mutual funds and funds that charge low fees instead of funds that promote high returns.

The professors were asked if investors should consider selling mutual funds implicated in questionable practices.

The answer depends on several factors, the professors said, including how much tax and brokerage fees an investor would have to pay on the sale of the shares.

Reuter recommended that people invest funds that track indexes, such as the Standard & Poor's 500 index, because, on average, they have better return than actively managed funds that try to garner profits through individual stock selections.

Finance professor Wayne Mikkelson noted that the scandals have so far involved funds with assets of about $5 billion, which is still relatively small compared to the $7 trillion industry.

He said the controversies will likely lead to reforms that will help honest investors.

The lesson for investors is that "you should be chasing low fees instead of chasing past performance," he said.

Most of the people in the audience were students, but several were investors, such as Ted and Diane Dearborn of Eugene.

The Dearborns have money in Putnam Funds, one of the fund firms under scrutiny.

Ted Dearborn said he attended the panel presentation for advice. "Now we'll have to go back and see where we stand" with the Putnam fund, he said.

To that, his wife added, "There's a good chance we'll sell it."