| 05 April 2004
VisionQuest Financial Planning LLC has stopped recommending mutual funds from the Janus and Strong fund families in light of recent inappropriate activities admitted by both companies.
The actions of Janus Captial Corp. and Strong Capital Management demonstrate that they have not been committed to putting the interests of shareholders first; therefore, we cannot continue to recommend their funds to clients for new investment. Further, as we review client portfolios we will consider replacing existing positions with other no-load mutual funds.
Several mutual fund companies, including Janus and Strong, were named in September by New York Attorney General Eliot Spitzer in a lawsuit against a hedge fund, Canary Capital Partners. The complaint alleged that Canary was allowed special trading privileges, principally market timing and late trading, which are detrimental to other investors. The conduct of Janus and Strong does not appear to be illegal, but it is certainly contrary to their stated policies and a breach of their fiduciary responsibilities.
Since the original complaint, Spitzer’s investigation has uncovered misdeeds by other fund companies. This scandal has rocked the mutual fund industry – which for more than 70 years – had been relatively scandal free. While these charges are serious and deeply troubling, investors need to keep things in perspective.
The economic impact on mutual fund investors from the activities in question is probably very small, and pales in comparison to the well-publicized abuses by the brokerage industry and corporate insiders uncovered in recent years. These problems are being addressed by legislators and regulators, which will undoubtedly make for better securities markets and greater protection for investors going forward. Similarly, the mutual fund industry is already acting in concert with regulators to institute reforms that should stop the market timing and late trading practices at the center of this controversy.
No-load mutual funds are still the best investment for most people, and I believe that there are many outstanding mutual funds companies deserving of our trust. Fidelity and Vanguard are two companies whose practices have shown a commitment to looking out for the interests of their shareholders. To protect our clients, VisionQuest will continue to emphasize no-load funds from Fidelity and Vanguard, as well as a few other fund companies who we believe put their fiduciary duties before their own profitability.
In recent years, I have recommended a few Janus and Strong funds that have had outstanding track records for performance. It is unlikely that these particular funds have caused clients to suffer any economic loss as a result of the allegations against the parent companies. Accordingly, investors should not feel compelled to immediately dispose of these funds, as they are likely to continue to perform well in the future. An individual should look at all factors, including the tax consequences, when assessing whether or not to sell a fund. We encourage investors to make their own decisions after weighing all of the facts.
Our decision to stop recommending these funds is based on principal rather than financial concerns. We simply prefer to work with companies that share our values and have high ethical standards.
The advantage of being truly independent is that our only concern is doing what is best for our clients. We do not receive compensation or benefits of any kind from mutual funds or other parties so we can be objective in rendering advice to clients. There are plenty of good investments available, so we will recommend other funds for client portfolios.
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