Controversies Threaten to Halt Fund Industry’s Growth : Mutuals: Latest blow to public trust involves Piper Jaffray funds’ losing one-fifth of their value.

An unprecedented stream of scandals and controversies this year threatens to halt the mutual fund industry’s explosive growth.

“There is a tremendous escalation in controversy in the fund industry,” said Bob Powell, editor of Mutual Fund Market News in Boston. “It’s a recipe for disaster.”

More than 5,000 funds are now available to investors and the amount of customers’ assets under management has doubled, to about $2 trillion, since 1990. The industry has grown because investors trust fund managers to deliver the safety and above-average returns they promise. A series of problems threatens to undermine that trust.

“I don’t think there is any doubt when you see dozens of stories in newspapers with headlines saying ‘trust betrayed’ on page one, that has an effect on shaking investors’ confidence,” said John Rekenthaler, editor of Morningstar Mutual Funds, a newsletter in Chicago.

Problems have already set in. For example, the growth in fund assets has stalled so far this year.

Sales of stock, bond and income mutual funds totaled $31.5 billion in July, according to the Investment Company Institute, a Washington, D.C., trade group. That compares with sales of $36.6 billion in June and $43.4 billion in July 1993. Through the first seven months of this year, the ICI said, assets of all funds grew at an annual rate of just 5%.

From 1990 to 1993, Lipper Analytical Services Inc. said, fund assets doubled, to about $2 trillion. That performance reflected an average annual growth of 33% during the period.

To be sure, total fund assets may rise if equity funds benefit from the stock market’s recent surge. That won’t be much help to the sagging bond funds, though.

For its part, the Securities and Exchange Commission is “seeing to it that funds do not involve a measure of risk that is inconsistent with the description of the fund,” Arthur Levitt Jr., chairman of the SEC, said last month.

The latest blow to public confidence in the investment industry occurred just last month, when it was disclosed that Piper Jaffray Cos. fund manager Worth Bruntjen’s funds have fallen $705 million to $2.8 billion. All six of his funds lost a fifth of their value because of his investments in high-risk mortgage-backed securities, whose value plummeted as interest rates began to rise earlier this year.

Seven individual shareholders and a Teamster union affiliate have sued Piper Jaffray. They charge the Minneapolis-based firm failed to disclose properly the risks of the funds’ investments.

Piper Jaffray denied the charges. Addison Piper, the firm’s chairman and chief executive.

Other mutual fund leaders seem less sanguine about the effects of the Piper Jaffray fiasco. Asked to comment about his industry’s image in the wake of the Piper Jaffray incident, George Collins, president of Baltimore-based T. Rowe Price, which manages about $29 billion, tried to evade the issue.

“I don’t want to talk about it,” Collins said. “Nothing on the record.”

A. Michael Lipper, president of Lipper Analytical, said it is “very important for the mutual fund industry to manage the public’s perceptions.”

Analysts say the fund industry has generally moved swiftly to calm investors following a scandal, but they chide the industry’s leaders. “They are just now becoming aware of the depth of concern out there,” Morningstar’s Rekenthaler said. “It’s not just two or three newspaper articles that are going to go away.”

Lipper said: “The question is, will alternative investments become more attractive--real-estate private placement programs, for example? If that happened, then I would be very concerned for the fund industry.”

For now, executives must grapple with the sales-practice issues.

“The industry must improve its communications and disclose more information,” Lipper said. “Investment strategies should be evolved for the long term.”

“At Piper Jaffray, communications about the fund were so far apart from how the fund was actually run,” Rekenthaler said, noting that Piper had told investors that the fund was conservative.