Mutual Fund Returns May Not Be As They Seem!

Arthur Levitt, during his tenure at the SEC, experienced many cases where the non-indexed mutual fund manager bought shares for their own accounts before the fund bought the shares. The fund's purchases drove up the price of the stocks and the fund manager's made a killing on the deal. This is called "front running," and is illegal under securities laws.

Mr. Levitt also witnessed instances where the funds would buy huge blocks to run up the stock price at the end of the financial reporting period. This made the fund look like it had a high profit when it did not. This makes the fund's performance look better than it really is.

The SEC brought enforcement cases against some of the largest and most respected companies during Mr. Levitt's tenure as SEC chairman. A mutual fund run by Van Kampen Investment Corp. for example, claimed in public advertisements that it had returned 62 percent in 1996. This information caused the fund-rating service Lipper Inc to report the mutual fund as the top performer in its class, a full 20% ahead of the second-best performing fund in the category.

But investors weren't told that the excellent returns of the Van Kampen fund were on tiny assets of $200,000.00 to $380,000.00. This is because it was really a so-called incubator fund operating on seed money until its portfolio manager could establish a track record for marketing purposes. Nor were investors told that more than half the returns came from investments in thirty-one hot IPOs. An IPO is an "Initial Public Offering" that occurs when a firm first offers its stock across a public exchange. Since the stock is new nobody knows how it will perform except insiders.

The fund only had to buy between 100 and 400 shares of each IPO to achieve a huge amplification of the returns. The 62% return unrealistically raised investor expectations and was unsustainable. When senior managers of Van Kampen decided to sell the fund to the public some 15,000 people invested $100,000,000.00 within six weeks. Van Kampen settled SEC charges that it had misled investors. What a bunch of con artists. The modern day mutual fund is like a remake of the movie "The Sting" where Paul Newman's character has been replaced by the fund manager!

A fund run by Dreyfus Corp., owned by Mellon Financial Corp., paid almost $3 million to settle, without admitting or denying guilt, similar charges of fraudulently luring investors with unsustainable returns. Its manager claimed returns of more than 80%, but failed to tell investors that the fund had received a disproportionate number of IPO shares that should have been allocated to other Dreyfus funds.

The fund industry should work less on image creation and more on making sure that it has done everything it can to safeguard investor's money and boost returns. The mutual fund industry has become a financial powerhouse over the past twenty years and only cares about how much money it can suck out of the public just as it was at the turn of the last century when they were called investment pools. Funds are glitzy marketing operations instead of stewards of other people's money. Don't put your trust in them unless they are fully indexed like the Vanguard 500 (VFINX).

ABOUT THE AUTHOR: Dr. Scott Brown, Ph.D., a.k.a. "The Wallet Doctor", is a successful futures trader, real estate investor, and stock investor. Dr. Brown holds a Ph.D. in finance from the University of South Carolina. His 1998 articles in Technical Analysis of Stocks and Commodities were prophetic in predicting an impending stock market crash. He has helped many people become profitable investors by teaching them to look out over many years to spot stocks that are low and primed for rise in the new bull market. His second article met with approval by Dr. Bob Shiller of Yale University. Dr. Shiller is the economist that Alan Greenspan most highly regards who coined the term "Irrational Exuberance." In 1998 he shouted to the world to "get out" of the stock market but now he is shouting to everyone that it is time to "get in!" The Wallet Doctor is not only sought after for investment advice and coaching in stock investing but also in futures trading and real estate investing. Visit Dr. Brown's site at http://www.BonanzaBase.com or sign up for his investment tips at http://www.WalletDoctor.com

---

How To Start Investing For Financial Independence, Part 1

Today, I am going to start a multi-part series about... Read More

Justify Social Security ... Dont Save for Retirement

It is a common question when investors review their retirement... Read More

Stocks: Reduce Risk Yet Maximize Profits

It is important to note that every smart investor wants... Read More

Rolling your 401k: Contributory IRA vs. Rollover IRA

In an ideal world you would start your working career... Read More

Investors: Avoid These 5 Common Tax Mistakes

For many investors, and even some tax professionals, sorting through... Read More

A Secret Revealed: Why Most (Day) Traders Fail

The following perspective on (day) trading comes from my many... Read More

Playing With Money - And Making More

Ready to start playing with your money? Not interested in... Read More

Remembering TEOTWAWKI and Learning from It

Its only been about 5 years since we had major... Read More

Financial Planners

"Financial planners are like dentists: they may occasionally inflict pain,... Read More

Investing 101: Risk Terminology - BETA

About thirty years ago, statisticians armed with all of their... Read More

Commodities - The Next Big Wave of Fortune Building

Have you often wished you could have got in on... Read More

The Conflict of Interest Game

Disgruntled investors are going after Wall Street once again, this... Read More

When Its Too Late to Save for Retirement

You are 55 years old (or somewhere around there) and... Read More

Raising Capital in Today?s ?New Economy?

We've helped a number of clients develop business plans and... Read More

Success Trading: More Basic Terminology for New Traders

One important aspect of trading the markets is to understand... Read More

Retirement is Never Urgent Until

If you're like many people, your retirement savings have not... Read More

The Benefits of Laddering Your CD Investments

If you've decided to stock some money away in a... Read More

Begging Your Trust in Africa

The syntax is tortured, the grammar mutilated, but the message... Read More

Stocks, Oil, and Bonds

A barrel of oil bounced to over $60 Thu, which... Read More

Is a SEP Plan Right For Your Business

A SEP is a special type of IRA. Under a... Read More

Credit Scores = ROI Profits for Real Estate Investors

Strong credit saves real estate investors money on mortgage finance... Read More

Is Offshore Banking for You?

You've probably heard about people who keep their money offshore.... Read More

The Perfect Mutual Fund

The Perfect Mutual Fund is the one you build yourself!The... Read More

Protecting the Tax Advantage of Your Deferred Compensation

The American Jobs Creation Act of 2004 imposed strict new... Read More

Waiting 20 Years Can Cost You Millions - Dont Wait Start Today

Many Young people live for Today. They really don't fully... Read More

A Gadfly On A Dinosaurs Butt, Or The Hood-winking Of The American Investor

Have you ever noticed how some words in the English... Read More

Powerful Options Basics Lessons Improving your trading in 180 days.

An option is a traded security that is a derivative... Read More

Now is the Time to Invest for Your Retirement!

Yes, it's the time we've all been waiting for?tax season!... Read More

Ask The SEC

Who is the SEC and why should I ask them... Read More

Dumb Money

Many people have, at one time or another, taken some... Read More

Risk and Reward

If you are doing your own investing in the stock... Read More

Is Your Mutual Fund the Right One for You?

Mutual Funds are considered to be one of the best... Read More

Bearish or Bullish?

If you are interested in stock investing and the stock... Read More