Market unfazed by fund scandal

NEW YORK -- It's one thing for investors to shrug off the mutual fund scandal. It's another to think there's no risk to their stock portfolios.\nThe latest round of bad behavior coming from the business world hasn't fazed the market at all, a big change from the not-so-distant past. In fact, stocks have advanced since first word of the improper trading allegations came out, largely a result of the improving economic indicators.\nBut that doesn't mean every corner of the market will be spared from selling. There are ways for individual stocks to get hit and the scary part is that it can happen without much warning.\nIt was just last year that allegations of wrongdoing against companies like WorldCom and Tyco sent the market into a tailspin. Investors were quick to dump those stocks, fearing more trouble just around the bend.\nNot this time. Since the scandal hit right after Labor Day, the market is up about 2 percent. So much for the 90 million Americans invested in funds being roiled by the investigation now involving dozens of fund companies and brokerage firms.\nThe muted reaction may just have to do with timing. Previous scandals shook already battered investors dealing with a bear market and a weak economy.\nToday's market is up sharply since March and recent economic data supports the view that the recovery is well under way. Had things not been looking up, this scandal could have caused a mighty mess.\n"When the market is good and investors see their portfolios rising, that makes them feel better and changes how they might react to this kind of news," said David Joy, vice president of capital markets strategy at American Express Financial Advisors in Minneapolis.\nThis may also be because investors have few other places to go with their money. Now that the bond market is pulling back and low interest rates continue to hold down returns on other investments, stocks seem attractive.\nAnd those that have pulled their money out of fund companies tainted by scandal appear to be redeploying it immediately into other funds rather than holding onto the cash. AMG Data Services estimates that more than $20 billion went into funds in October, the largest inflow this year and the most since March 2002, according to AMG President Robert Adler.\n"If people learned anything over the last 20 years, it's that they have to stay in the market," said Stephen P. Wetzel, professor of financial management at New York University. "If now they are yanking any money out, they aren't keeping it out. They are just putting it somewhere else."\nStill, investors shouldn't think that this scandal won't -- or can't -- affect their pocketbooks.\nShould many of Putnam Investment's 12 million customers decide to redeem their shares because of the allegations from regulators that the fund company committed fraud in its trading practices, Putnam could be forced to dip into its assets. And if it ends up having to sell stocks, that could depress the value of those shares, especially small-cap stocks of which it owns a large proportion.\nOr consider the potential problems facing Janus, which also has been accused of improper trading.\nThe Colorado Public Employees Retirement Association board voted last week to remove Janus' flagship fund from the 401(k) investment options available to 71,000 members. About $30 million of the $828 million of its 401(k) plan was in the Janus Fund.\nTo start, that reduces the cash the Janus Fund manager has to put toward buying new investments. And a rush of redemptions could mean the manager has to sell some of the fund's holdings, which include Comcast and Time Warner.\nSo while this mutual fund scandal might not be setting off investor panic, there is certainly reason to pay attention to it.