Sep. 29–CHAMPAIGN, Ill.– Investors choosing mutual funds often look too much at past performance and not enough at fundamentals, a nationally known expert on mutual funds says.
Don Phillips, managing director of the Morningstar mutual funds rating service, said that’s one reason many investors ended the 1990s with portfolios that gave “the illusion of diversification” while being concentrated in one area.
Phillips spoke to about 500 investors Wednesday night at the Virginia Theatre in Champaign as part of a seminar sponsored by Busey Investment Group.
He told of one investor who asked for help in rebalancing his portfolio.
The funds in the portfolio all had excellent records of return during the same period of time, but they were all growth-oriented funds from the same fund family, and 60 percent of the holdings were technology stocks.
“There was no hope of rebalancing that portfolio,” Phillips said.
Phillips instead urged investors to look at fundamentals: a company’s corporate strategies, its financial ratios, its income statements and balance sheets and a competitive analysis of the business it’s in.
He urged diversification, holding value and growth stocks with small, medium and large capitalizations. And he preached the discipline of staying in the market, and not moving in and out when prices rise and fall.
“We need to recognize that investing is not a game,” he said. “It’s a means to an end of securing a better future for you and your family.”
Phillips was hired by Morningstar in 1986 as a mutual fund analyst and developed many of the systems Morningstar uses to rate various funds.
He’s frequently featured in investment magazines and recently appeared on “Louis Rukeyser’s Wall Street” on CNBC.
During an interview last week, Phillips touched on a recent scandal involving four well-established mutual fund companies, one of the latest firestorms facing the financial services industry.
It’s getting so bad, Phillips said, investors are suffering from “scandal fatigue.”
Until this month, the mutual funds business was “the last bastion” in the financial services area “you could believe in,” he said.
But in early September, New York Attorney General Eliot Spitzer accused four mutual fund companies Janus Capital Group, Strong Capital Management, Bank One Funds and Bank of America’s Nations Funds of allowing a hedge fund, Canary Capital Partners, special trading access that other investors didn’t have.
Namely, the four companies were accused of allowing the hedge fund to make “timing trades,” even though their prospectuses stated such practices were discouraged. With timing trades, traders take advantage of time differences to turn profits.
Spitzer also accused Nations Funds of allowing “stale pricing.”
Usually, orders placed before 4 p.m. Eastern time on a certain day are given the 4 p.m. price. Orders placed after 4 p.m. are given the next day’s 4 p.m. price.
But Spitzer claims Nations Funds gave the hedge fund the 4 p.m. same-day price, even when orders were placed as late as 8:30 p.m.
Phillips likened that to allowing someone to bet on a horse race after the horses are already out of the starting gate. Often, companies release earnings reports after the market’s 4 p.m. closing, and that information can give traders a leg up.
Canary Capital Partners has agreed to pay $40 million to settle the charges against it.
The four mutual fund companies, though named in the complaint, have not been charged.
Phillips called the charges “a black eye for the fund industry” and said it would be in the industry’s best interest not to fight them, but to “take its medicine” and give assurances that such practices won’t happen again.
He said the fact that Spitzer, with a relatively small enforcement staff, broke the news raises questions about the Securities and Exchange Commission, the federal agency that’s supposed to provide oversight.
“I don’t know where the SEC was, but I guarantee they’ll redouble their efforts because they look bad in this scenario,” Phillips told the seminar audience.
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MSTR, GE,
