Two Big Fund Pluses

By Dian Vujovich

Mutual fund shareholders need to let out a big “whew” for missing Bernie’s Bad.

No matter how the Bernard Madoff story plays out, he was a hedge fund manager. Not the CEO of a publicly traded company in which shares could be bought and sold on any of the major exchanges. That means his company was not one that mutual fund portfolio managers could peruse and decide—or not decide—to invest in. Like I said, that’s a big “whew” for mutual fund shareholders.

Whether or not you’re a fan of mutual funds, they’ve got a couple of really good things going for them that hedge funds don’t. One is, they are highly regulated and as such transparent. Congress made that happen when they passed The Investment Company Act of 1940. That Act gave the Securities and Exchange Commission (SEC) the authority to regulate investment companies, like mutual funds and exchange-traded funds (ETFs).

That regulation made sure that there would be regular public disclosure of a fund’s financial situation along with their investment policies, the fund’s objectives, what’s in their portfolios and the fund’s pricing and fees.

Hedge funds, however, are a different story— as most of the world now knows. Because they are sold to the wealthy, the thinking has always been that there’s no need to oversee them. Or disclose much of anything about them. I figure that will change in the near future. Or maybe not.

A second big plus for mutual funds is that you can get your money out of them easily. No excuses made. Ever. If there is a perceived downside to that it is this: Too many requests for shareholder redemptions and not a large enough cash position to cover them means that a fund manager will have to sell some of the portfolio’s holdings to make sure the shareholder gets their money. Not much of a downside is it.

So just because the market whipped the stuffing out of funds in 2008, and things aren’t off to a wonderful start so far this year (as of January 15, Lipper reports show the average diversified equity fund down 5 percent), mutual funds aren’t such a bad deal when you really think about it.