2003 Lane Reports

Mutual Fun in Mutual Funds? Fuhgeddaboudit!!!.....Some Thoughts at Year-end.

Monday, December 1, 2003

The August 2003 Lane Report discussed the misdeeds of various players including Wall Street brokerage firms, banks, other corporations, and individuals. It also pointed out some constructive actions being taken to deal with those situations, including punishment of those involved.

However, in just the last two months, another entire scandal has broken, this time involving the mutual fund industry (and the complicity of both Wall Street firms and mutual fund executives) in illegal after-hours trading and market-timing schemes.

Nearly a year ago we raised some concerns about the mutual fund industry, its public relations offensive against new proposed rules for proxy voting, and its lack of attention and responsiveness to investor concerns generally. See "Accountability? Mutual Funds Must Come Clean" by Marc J. Lane, Crain's Chicago Business issue of January 6, 2003.

Investor outrage to this latest scandal seems surprisingly muted, though this relative calm might be partly explained by two factors. First, the abuses are so widespread within the mutual fund industry that investors may have some difficulty focusing their anger, whereas in the stock scandals there were relatively few, although large, targets for wrath. Second, the actual monetary losses involved are much less than in the stock scandals, both in the aggregate (perhaps single-digit billions of dollars, versus hundreds of billions) and at the individual account level (literally amounting to pocket change per investor, versus wiped-out savings and retirement accounts as in the Enron, WorldCom, etc. debacles.)

Compounding those two factors may be a widespread, almost malaise-like reluctance to take action, stemming from a popular assumption that, even if the mutual fund violations are fairly horrendous, there isn't much one can or should do about this latest episode anyway, given a lack of other clear choices, and perhaps given the negative effects of fees and taxes which might be incurred to unwind current positions.

For the reasons outlined below, right now just might be a great time to reassess your mutual fund holdings, especially as we approach year-end (and losing positions, if any, might possibly be harvested for tax purposes.)

In "A Case for Professional Money Management", Brad Strom, Senior Vice President & Portfolio Manager, of Marc J. Lane Investment Management, Inc. stated that "…. professional advisors bring 'disciplined rational decision-making' to what is often times an emotional process. They also bring a level of customer service not available outside the world of professional asset management. And lastly, professional managers like Marc J. Lane Investment Management, Inc. can provide all these benefits at or below the cost that most mutual funds charge." We encourage investors to go back and read Brad's article, especially in light of current events.

Here's where it gets especially interesting. Our forte at The Law Offices of Marc J. Lane, P.C., and its financial affiliates has always been helping successful people make the right legal and financial decisions. But what exactly constitutes the "right" decision may be undergoing a sea change, i.e., a new paradigm, for many investors, and for the few enlightened professionals who help them attain their goals. Specifically, recently published reports indicate that today:

    • 71% of surveyed investors said that they agree strongly (35%) or somewhat (36%) that companies operating with higher levels of integrity carry lower investment risk;
    • 68% of those surveyed said they agree strongly (31%) or somewhat (37%) that companies operating with higher levels of integrity deliver higher investment returns; and, most interestingly of all,
  • 92% want their financial advisors to investigate the ethical as well as financial performance of investments before making recommendations.

We at Marc J. Lane Investment Management, Inc. share these views, and believe we are uniquely positioned to help investors address their concerns about corporate governance, and the social and ethical ramifications of their investments. We are addressing these issues with a unique style of Socially Responsible Investing ("SRI"), which we have branded Advocacy InvestingSM.

To many observers, SRI represents the negative process of excluding from an investment portfolio certain socially or environmentally undesirable industries, such as tobacco, alcohol, gambling, defense, chemicals, mining, timber, and energy. There is a common perception in the investment community that this process may result in portfolios which are not sufficiently diversified and may underperform the general market.

On the assumption that, as social investors gain insight and sophistication, they are less likely to rely primarily on negative screening by product or industry, Marc J. Lane Investment Management, Inc. has introduced Advocacy InvestingSM, a combination of positive portfolio screening strategies that, (after first screening for sound fundamentals and acceptable governance, as we do for all portfolios,) seeks to identify companies whose corporate behavior can promote the investor's own beliefs and values. These may relate to such social concerns as a company's practices in community involvement, diversity and employee relations, the environment, and human rights.

Advocacy InvestingSM is particularly appropriate for mission-based organizations, such as non-profits, charities, and foundations, as well as forward-thinking individuals who want their investments not only to help them attain their long-term goals, but also to reflect their personal values. After an in-depth process of "drilling down" to ascertain the desired corporate behavior to be emphasized, we build and monitor a separate and unique portfolio for each client (not a mutual fund or pooled account.)

With year-end approaching, now might be a very good time indeed to think about whether you would like to have your investments reflect your core beliefs and values, especially in these turbulent times, and to re-assess your holdings, especially mutual funds, to make sure they are consistent with your goals and objectives, both financial and perhaps non-financial as well. We would be pleased to discuss these issues, and their profound ramifications, with you and any of your family members or associates who may be affected by the wisdom of your investment decisions.


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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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