Mitigate Mutual Fund and Manager/Management Company Risk

[chinaco]

The recent Madoff debacle and others that have occurred over the years shows what can happen if too many eggs are in one basket. Of course, Madoff was running without much SEC scrutiny.

I have read that Mutual Funds are organized as separate entities and shielded from one another and the Funds management company if it goes bankrupt. Plus each funds board must have members that are independent of the investment advisers.

When it comes to individual mutual funds and/or fund management companies, there could be some management risk. Be it malfeasance (because of opportunity) or just stupid mistakes. Are the built in measures established by the Investment Company Act of 1940 enough?

• How concerned are you about it?
• If you are concerned, how do you deal with it? Do you use multiple mutual funds? Multiple Fund companies (where you actually have specified amounts spread to mitigate risk... as opposed to it just turned out that way.). For example: did you split your assets evenly between VG and Fido or others?

 

[smjsl]

Are the built in measures established by the Investment Company Act of 1940 enough?

• How concerned are you about it?

My impressions:
- board is useless and not independent at all - assume there is no board
- shielding does not necessarily work
Example: see articles about The Reserve (the oldest money market company) trying to use investor money to pay the lawyers to defend the management - and that's for both money market fund that broke the buck and a mutual / bond fund related to it (ryptx/rypqx).

• If you are concerned, how do you deal with it? Do you use multiple mutual funds? Multiple Fund companies (where you actually have specified amounts spread to mitigate risk... as opposed to it just turned out that way.). For example: did you split your assets evenly between VG and Fido or others?

I only have mutual funds in 401(k) now (foolishly thinking my MegaCorp would do something if one of their chosen funds tried to pull "The Reserve"), but perhaps I will switch these too. I use ETFs for the rest, but perhaps same concerns apply there too; so I don't have a good answer here. Oh yeah, I also have individual stocks themselves - I guess this does not have the extra man-in-the-middle risks

 

[chinaco]

[/LIST]
My impressions:
- board is useless and not independent at all - assume there is no board
- shielding does not necessarily work
Example: see articles about The Reserve (the oldest money market company) trying to use investor money to pay the lawyers to defend the management - and that's for both money market fund that broke the buck and a mutual / bond fund related to it (ryptx/rypqx).
...

Regarding your comment on the board... or any sort of management oversight... I think we can look at AIG, Lehman, Bear Stearns and others to see how much backbone they might exert.

However, the large fund companies (and individual funds) are audited by top independent auditors. So someone independent is looking at their practices and the books. Of course, this is no guarantee (looking back at AIG)...


Do you have enough faith in Fido or VG to keep all of the assets with one of those companies?

 

[samclem]

Do you have enough faith in Fido or VG to keep all of the assets with one of those companies?

80%+ of our money is with Vanguard and I have no problem at all with that.

I think hanky-panky is more likely in small firms and boutique investment shops. There's a lot of oversight and media attention on the big guys. Plus, as Vanguard (well, Bogle at least) have pointed out some of the self-serving behavior and investor-hostile actions of corporate America and MF companies, I'm sure they know that a lot of folks would LOVE to find some dirt on them. That, I think, will also keep them honest.

 

[chinaco]

80%+ of our money is with Vanguard and I have no problem at all with that.

...

I think that passive index funds (fund of funds based on passive index funds) provide less chance for a manager to scr3w it up.

If in fact index funds limit managers' discretion. Then the next category of problem could be fraud (ala madoff). Most mutual fund companies have internal and external auditors looking at activity, plus other management check/balance controls in place. If they have one of the large audit firms checking the books, that should provide some management of risk against fraud or deviating from the Funds charter.

 

[donheff]

Mutual funds can have problems and they can effect prices significantly if investors run for the door (a la Putnam a few years ago). But with any of the major companies I don't think we need to worry that they don't actually have any underlying assets like Madoff.