Mutual Funds: Seeking Safety Amid Scandal

Nov. 13 -- As if finding a safe investment wasn't tricky enough, the widening mutual fund investigation has made it even harder for investors to figure out where to put their money.

Market watchers predict some investors will start limiting their search to firms untarnished by the scandal. Managers of large pension and retirement plans are already steering clear of the troubled firms.

There are a number of companies that continue to look good, said Russel Kinnel, director of fund analysis at Morningstar, a fund and stock research firm. Among those considered more shareholder-friendly are Capital Research & Management's American Funds, Vanguard Group, T. Rowe Price Group Inc. and Fidelity Investments.

"That's not to say they're perfect by any means, but their priorities are right, their compliance is good and they think for the long term," Kinnel said. "It's not that these are firms run by saints, but they haven't lost sight of their fiduciary duties."

Federal and state regulators are examining trading practices at a number of fund firms where they say the needs of individual customers were sacrificed so a few large investors could make short-term profits. The case has focused on after-hours trading, which is against federal law, and market-timing, which is not illegal but is widely prohibited because it dilutes the returns of long-term investors.

Morningstar has recommended investors consider selling funds from five firms implicated in the scandal — Bank of America's Nations Funds, Bank One Corp., Janus Capital Group, Strong Capital Management Inc. and Fred Alger & Co — because their problems are serious enough that the risks outweigh any potential rewards.

It recommends limiting investments in Putnam Investments and AllianceBernstein from Alliance Capital, also named in the case, because the firms have serious issues to tackle both in terms of ethics and the quality of management.