Market Timers Aren't All Bad

Times Staff Writer

If you were going to choose a name today for an organization of active money managers, chances are you wouldn't pick the title that Steve Landis' association adopted in 1989.

The group is the Society of Asset Allocators and Fund Timers. As in mutual fund timers.

Given that the scandal enveloping the fund industry is centered on certain timing practices, Landis and his peers might as well call themselves the Society of Mutual Fund Evildoers. Because that's the image the group's name may evoke with average investors.

Yet these are legitimate money managers working for legitimate clients and engaging in what the managers believe are perfectly legal investment strategies.

Nonetheless, "some members feel that we have a bull's eye on our backs now," said Landis, an Ohio financial advisor who is vice president of the society.

There are some glaring ironies involved in the fund timing scandal, but perhaps none bigger than this one: The attack on the general idea of using mutual funds to make market-timing moves comes as many Wall Street pros -- and many individual investors -- have concluded that "buy and hold" may not be the best strategy in this decade.

If the effect of the unfolding scandal is to make it more difficult for all investors to make changes in their portfolios, or to justify changes, it isn't at all clear that the average fund owner's interests would be helped. It might be just the opposite.

On the other hand, the mutual fund industry's interests certainly would be served if people just bought fund shares and never sold, regardless of individual portfolio performance or broad market trends.

Defending market timers might seem a dangerous course, but it's largely a matter of definition. Obviously, there can be no defense for what is forbidden under the law. If a group of Prudential Securities brokers in Boston was engaging in rapid trading of mutual funds by misrepresenting themselves and their clients to avoid detection in their transactions, that would appear to constitute fraud.

Those allegations were at the heart of charges brought against the brokers last week by the Securities and Exchange Commission and by Massachusetts securities regulators.

It's also potentially fraudulent if a fund company tells most of its investors that it discourages active trading of fund shares, then accommodates such activity for favored clients or for the personal accounts of its own fund managers.

That's the gist of the federal and state charges filed this month against Putnam Investments, the fifth-largest U.S. fund company. And Eliot Spitzer, the New York attorney general who has spearheaded the investigation of the fund industry, has threatened to similarly charge Strong Capital Management Inc. and its founder, Richard S. Strong.

Putnam has said it did not commit fraud. Strong Capital has said it is cooperating with regulators in their probes.

Quite apart from the above, there is no law against the simple act of buying a mutual fund one day and selling it the next day, week, month or year.

The argument put forth in most of the news stories about fund timing is that it can hurt buy-and-hold investors by raising a portfolio's trading costs (as the manager is forced to buy or sell securities to deal with cash inflows or outflows). What's more, rapid traders may effectively "skim" away as short-term gains profits that might have accrued to long-term investors.

But the numbers on all of this are squishy at best. And most fund industry observers agree that whatever the cost may be to buy-and-hold investors, it probably is small compared with other fund practices that cost them money -- for example, the imposition of so-called 12b-1 fees, marketing expenses levied on many funds year after year.

In any case, timing transactions are a natural, and necessary, element of free financial markets. Some timers will make the right decision, and some will make the wrong decision. For the markets to work, investors must be allowed to win or fail within their legal rights.

The Society of Asset Allocators and Fund Timers says it's a group of about 200 money managers who direct about $15 billion in clients' assets, much of it in mutual funds. They generally aren't managers who make large day-to-day shifts in assets, said Ann Miller, a Houston investment advisor who is the society's president.

"I don't know anybody who trades every day," she said.

Landis, based in Columbus, Ohio, and managing about $4.5 million for 50 clients, is more typical. He tries to ride short-term stock market trends with the goal of earning about 1% a month, he said.

Central to his strategy is limiting the risk of being carried down in a sustained plunge -- like the bear market that ravaged buy-and-hold portfolios from 2000 until earlier this year.

"My goal is market-competitive returns with less risk," Landis said.

The perennial problem most investors face is knowing when to sell. Landis and his peers at least offer strategies that are disciplined about selling.

There is no guarantee that a timing strategy can beat buy-and-hold in the long run. Still, the concept of limiting downside risk probably makes a lot more sense to many investors today than it did in the late-1990s, before the long bear market.

"I think we're going to have some tremendous rallies in the next five years -- but also some tremendous declines," said Bo Bills, a Franklin, Tenn.-based society member who uses timing strategies to manage about $60 million for clients.

Miller says all that her members want is to be able to use mutual funds to make or terminate market bets within the law. What she fears is overreaction by Congress, regulators, fund companies and other investors.

"Why restrict the individual investor's right to trade?" she said.

To make their point, the society has hired a Washington lobbyist to represent their interests.

Miller also said the group will almost certainly change its name next year to remove "fund timers" in favor of some new title that probably includes the words "risk" and "active."

Miller said a name change had been discussed earlier this year, before the fund scandal broke, but that members decided to postpone it a year.

"Little did we know," she said.

Tom Petruno can be reached at

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