Nov. 25–Investors have pulled billions of dollars out of mutual funds implicated in recent scandals. Yet, some are not sure whether to pull the plug and move on to one of about 10,000 other funds orhold on to what they have for a while. After all, with investigations ongoing in the mutual fund industry, there are no guarantees that an investor leaving one tainted fund won’t end up in anotherthat could come under scrutiny.

Plus, selling a fund can be a mistake if fees and taxes are excessive. But if you are sitting on the fence, perhaps recommendations made by Morningstar, a Chicago-based firm that analyzes and rates mutual funds, will help you decide what to do.

ALGER: “Steer clear,” advises Morningstar. James Connelly, head of fund sales for Fred Alger Management, settled charges with the Securities and Exchange Commission and pleaded guilty to obstructing the investigation.

“Given the serious breach of fiduciary duty implied by these events, we recommend that investors consider selling their Alger funds,” says Morningstar.

Alger has suspended Connelly, but even before the scandal Morningstar was “lukewarm” on Alger funds because of high expenses averaging 2.54 percent. The industry average is 1.4 percent.

ALLIANCEBERNSTEIN: “It’s time to consider selling,” says Morningstar. Although Alliance has suspended two employees, “sent two executives packing,” and shown a desire to confront the scandal, Morningstar says, “We still have grave concerns about a corporate culture that would allow a mutual fund manager to put the interests of well-heeled hedge-fund managers ahead of his own shareholders in the first place. You can’t change a corporate culture overnight.”

In addition, only three of AllianceBernstein’s funds — three municipal bond funds — satisfy Morningstar’s criteria for low expenses and above average returns compared to peers. “Forty-three percent of Alliance funds charge more than 1.75 percent — a cost that makes it nearly impossible to overcome a benchmark.”

FEDERATED: “Don’t send any new money,” says Morningstar. Neither the SEC or New York attorney general have brought charges against Federated. But the company disclosed to its stockholders that it was investigating possible trading irregularities.

Morningstar also criticizes Federated for informing its stock shareholders, but not the people who own shares in its mutual funds — or the people most directly affected.

“Federated needs to come clean,” says Morningstar.

JANUS: “Does not deserve investors’ confidence,” says Morningstar. Regulators have alleged that some Janus executives allowed questionable trading even though some within Janus objected. Morningstar interprets that as: “Janus placed its own monetary interests ahead of investors.”

Janus has offered full restitution to harmed shareholders, but Morningstar says, “What soured our stomachs with Janus in particular is that the firm already had two major strikes against it: poor bear-market performance and noteworthy management departures.” Add that to recent allegations and, “Three strikes, you’re out.”

PUTNAM: “Hold off on sending new monies to Putnam,” says Morningstar. Putnam has confirmed that six fund managers were making short-term trades in Putnam funds to the detriment of fund shareholders.

While the wrongdoing is among the worst offenses to emerge in the fund scandal, “we see some strong positives that lead us to stop short of recommending that investors consider selling,” says Morningstar research director Russell Kinnel.

Although Putnam hadn’t stopped its fund managers from trading quickly in and out of international funds before regulators began investigating the fund industry, Morningstar praises Putnam’s board for quick action once irregularities came to light. Among the actions: removing the six professionals and CEO Larry Lasser, while initiating a system of internal oversight for the future.

Meanwhile, with the departure of the six professionals, Putnam has lost a couple of its most skilled fund managers. “It may be years before Putnam funds have a lot of appeal,” says Morningstar.

STRONG: “Should be avoided,” says Morningstar. “It’s the equivalent of earning an F letter grade.”

Morningstar has criticized Strong funds board members for misplaced loyalties because they have kept fund investors in the dark while the head of Wisconsin-based Strong Capital, Dick Strong, is facing an investigation into his personal trading practices within the funds — practices that may have enriched him at the expense of fund shareholders.

“The board should be determining whether Strong is the right person to lead the firm out of this mess,” says Morningstar. “It will be awfully difficult to regain investors’ confidence and prevent outflows (of money from the funds) while Strong is at the helm.”

Meanwhile, Morningstar notes many Strong funds have been mediocre while loads and expenses have been climbing.

PBHG: “Consider selling,” says Morningstar. Gary Pilgrim and Harold Baxter, the founders of Pilgrim Baxter & Associates, which manage the PBHG funds, have resigned and been charged with fraud by the SEC and New York attorney general. The allegations against the two founders are among the most serious coming out of the ongoing mutual fund investigation into trading practices.

Pilgrim allegedly invested in a hedge fund that he allowed to trade rapidly in and out of his fund. And the trading allegedly damaged long-term investors.

“If true, Pilgrim’s actions and Baxter’s approval of them show that the pair was willing to put personal financial gain ahead of fiduciary duty to their shareholders,” says Morningstar. “Regulators suggest that, in effect, Pilgrim expected investors to show confidence in his process by staying invested in PBHG funds in good times and bad, but he didn’t have the stomach to do so himself.”

NATIONS AND ONE GROUP: “Avoid,” says Morningstar. Nations funds, offered by Bank of America and One Group offered by Bank One, were two of the earliest fund groups implicated in investigations.

Morningstar says investors should avoid the funds because allegations suggest the businesses lured large investors with special privileges not offered all investors.

Gail MarksJarvis can be reached at gmarksjarvis@pioneerpress.com or 651-228-5488.

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