Market timing dominates opening session at IFIC conference

(September 29, 2004) With all the recent regulatory and media scrutiny over market timing in the mutual fund industry, it perhaps wasn’t surprising that the issue quickly became the prevailing theme at the opening of IFIC’s annual conference on Wednesday in Toronto.

Ned Goodman, head of Dynamic Mutual Funds, started the ball rolling during an industry panel discussion. The often blunt-speaking industry veteran noted that market timing is not illegal and that the Ontario Securities Commission found no evidence of the activity in the past year. The four fund firms named by the OSC so far (AGF, CI, Investors Group and AIC) are being asked to explain incidents of frequent trading between 2000 and 2003.

In addition, market timing only affects funds with international exposure, Goodman explained. “If you wheel down to the size of those funds and wheel down to the four companies that were mentioned and look at the international funds they manage, you don’t come up with a very large sum of money.”

Still, Goodman agrees the allegations are serious and he believes the OSC will extract “Spitzer-type” funds from the industry, a reference to U.S. fund crusader Elliott Spitzer, who has collected billions in fines from more than a dozen U.S. fund firms.

But it’s important to put the issue in context, Goodman added, noting that the decline in value of Nortel stock alone pulled $300 billion-plus out of the pockets of Canadian investors. “I don’t hear anyone yelling and screaming about that. The mutual fund industry has been sensationalized [by the media] with a very biased malice,” he added, later chastising a cameraman from the Globe and Mail for taking his picture.

The other panellists, Robert Frances of Peak Financial, Bruce Gordon of Manulife and Karen Fisher of Scotiabank all agreed that the market timing issue is generally not being raised by clients.

However, Frances noted that some advisors don’t understand the complexities of the issue, so they can’t really explain it. “If it’s too much trouble to explain it, advisors might simply switch to other products,” he warned.

Gordon added that for advisors, it comes down to the issue of trust. “If the spotlight erodes this trust, we all have a problem.”

In a speech following the industry panel, IFIC president Tom Hockin said that market timing, media criticism, and five years of soft markets have created the “perfect storm” for the mutual fund industry.

Although Hockin says he believes the OSC will act responsibly and not “needlessly destroy” the fund industry, he conceded that all those involved have some work to do to restore investor confidence in mutual funds.

During the panel discussion, Goodman said he thinks IFIC should be far more proactive, instead of trying to appease its large member firms. “[IFIC] should be representing the small investor and shouldn’t be worried about whether they’re pissing off a bank,” he asserted.

But in his speech, Hockin strongly defended his organization, saying that IFIC is “out front” on all fund-related matters.

“I will debate anyone who says IFIC is irrelevant,” he argued, pointing to he fact that the organization has produced 26 major regulatory submissions so far this year in addition to a series of recommendations to member firms aimed at addressing market timing, such as consistent trade monitoring, mandatory fees for inappropriate short-term trading and fair value pricing.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com