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Mutual Fund News

Market timing? Who cares now that funds are hot again

This month marks what will likely be the last feeble gasp of the mutual fund market-timing scandal.

The fund companies involved have started to mail cheques to the clients they allowed to be exploited, and some people have already received their money. A surprise bonus for those examining their cheques is that the Canada Revenue Agency has taken a cut in some cases.

The market-timing scandal had a great run in the financial media after Globe and Mail reporter Karen Howlett documented the problem in June, 2004, but it never had more than a minor, passing impact on investor attitudes toward the fund industry. Unbelievably, the last laugh goes to the giants involved in the scandal.

It's safe to say this even as those cheques offer one last reminder to rank-and-file investors about what was done to them. For those who are still unclear about what happened, let's quickly recap.

Market timing is not illegal, but it can signal that a fund firm has breached its fiduciary duty to act in the best interests of all investors. As practised by some of the country's biggest fund companies, it involved wealthy or influential fund clients who received the special privilege of making rapid-fire moves in and out of funds. The profits from these trades came at the expense of rank-and-file unitholders who were encouraged to invest for the long term through a combination of short-term trading fees and propaganda about the benefits of buy-and-hold investing.

After an investigation by the Ontario Securities Commission, CI Fund Management, AGF Funds, I.G. Investment Management, AIC and Franklin Templeton Investments agreed to pay $205.6-million to those clients who lost out as a result of market timing.

The amount of each cheque relates to the fund or funds that the investor owned, the date they bought in and, if applicable, they date they sold or switched into something else (yes, you get a cheque even if you no longer own the fund; make sure the fund company or your adviser has your correct address). In one actual case, a cheque for $255 is going out to an Ontario investor who six years ago put $6,000 into a global equity fund that allowed market timing. Another investor who invested $500 in an affected fund in 1999 will get $24.

Cheques paid in connection with funds held in registered retirement accounts will have withholding taxes of at least 10 per cent applied, provided the amount is $200 or more. The money must be reported as income on your 2005 tax return. With non-registered accounts, no taxes have been taken off and the rules for reporting the money are explained in an insert that accompanies the cheque.

There's been some chatter about a class-action suit by investors who lost money from market timing, but it's obvious that the scandal has been forgotten by most people, if indeed they understood it to begin with.

One Toronto-area adviser's take on how clients regard the money they've received: "The reaction of getting the cheques was obviously one of joy from the calls I received. It's like found money. Some are reinvesting the money, but most are just spending the cheques."

The sales trend for the entire fund industry could hardly be better right now. The Investment Funds Institute of Canada reported $1.8-billion in net sales for August, the best showing for this month since 1997. Net sales are up about 20 per cent from the first eight months of 2004, a year that featured the best annual sales numbers since 2001.

Notice any impact from the market-timing scandal here? Truth is, market timing never bothered more than a tiny minority of individuals whose influence in the marketplace could hardly mean less. This is especially true now, when financial markets are strong, when investors are eager to participate and when many widely held mutual funds are delivering super returns. Of the 25 largest funds by assets, 10 are among their respective category leaders this year.

The lesson here is that when the markets are attractive, people will buy mutual funds. Bad publicity may sting for a bit, but people don't refuse to buy top-performing funds like CI Canadian Investment or AIC Canadian Focused simply because the companies offering them permitted market timing in some of their other funds.

The marketplace has spoken and the message is that market timing meant nothing. It was never a hanging offence, anyway. Better to classify it as a serious ethical lapse, a sign of Bay Street arrogance and yet another confirmation that small investors are too often seen as feedstock for the wealthy, influential or otherwise significant.

rcarrick@globeandmail.ca

© 2007 The Globe and Mail. All rights reserved.

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