In crisis, mutual funds fail to speak up

By Muralikumar Anantharaman

BOSTON (Reuters) - Lawmakers are angry and individual investors are livid. But if mutual funds are mad, they sure aren't showing it.

The $9.6 trillion U.S. funds industry is keeping almost stoically silent through the worst financial crisis in 80 years, despite its tumbling assets and its customers loss of retirement savings.

The silence is angering investors and some corporate governance activists, and potentially threatening chances of meaningful corporate reforms such as giving shareholders a voice on executive pay at companies.

"This is the largest block of shareholders. If we can't count on them, then we really are in trouble," said Jackie Cook, founder of Fund Votes, a fund proxy-vote tracking firm based in Vancouver, Canada.

"They just don't want to stick their necks out and ruffle management's feathers," Cook added.

Mutual funds owned about a quarter of all outstanding stock of U.S. companies in 2007, according to the Investment Company Institute, the funds industry trade body. That puts them in a unique position to set governance standards at firms, yet they rarely bring that influence to bear.

Two of the best-known stock funds, Fidelity's Magellan and Legg Mason's Value Trust, for example, had hardly a harsh word in their communications to investors in November for the financial sector firms that caused them heavy losses.

"Most of the fund company reports that I've read just identify the problems generally. I haven't seen too many, 'Well, the management of ABC Corp really messed up' kind of comments," said Richard Bregman, chief executive of MJB Asset Management LLC, a New York-based investment advisory firm.

Reflecting unhappiness with fund managers and fears over market conditions, investors pulled $136 billion out of U.S. stock and mixed-equity mutual funds in September and October, according to research firm Lipper Inc.

Portfolio managers are inherently less forthcoming than marketing-focused bankers or analysts at banks and brokerages. Some fund companies expressly prohibit managers from talking about investments they may be buying or selling.

Funds are also mostly "buy-and-hold" investors. They are not expected to be critical of their own picks and remain invested in them.

"The conventional wisdom among (fund) managers is to say they would potentially either stay with management or they would get out," said Barry Barbash, a former director of investment management at the U.S. Securities and Exchange Commission and now a partner at law firm Willkie Farr & Gallagher.

"HYPOCRITICAL"

Rather than getting out, some fund companies scooped up more of the fallen financial-sector names, likely causing more pain for investors as the stocks dropped even further.

American Funds, AllianceBernstein and Dodge & Cox, among other fund companies, bought more of Citigroup (C.N) in the quarter to September 30. Shares of Citigroup, the second-largest U.S. bank by assets, were trading on Friday at about $7.43, down 64 percent from September 30.