Dec. 10–T. ROWE PRICE LIKELY REAPING REWARDS OF HONESTY: Janus Capital, which secretly allowed select investors to rapidly trade in and out of its mutual funds while it publicly claimed todiscourage the practice, saw $2 billion walk out the door in October, according to Financial Research Corp.

Putnam Investments, accused by state and federal regulators of similar practices, suffered net withdrawals of $2.3 billion that month, FRC says.

The smaller Strong Capital, whose chairman, Richard S. Strong, is accused of hurting clients with rapid trading for his personal benefit, had $321 million in net withdrawals in October, according to FRC, and all three companies continued to see large outflows in November, according to filings and media reports.

T. Rowe Price Associates, scandal free so far, raked in almost $1 billion in October, according to FRC, much of it apparently from its disgraced rivals.

Usually, virtue is its own reward, but sometimes it generates a better return. Price, which has taken in at least $7 billion in new money this year, appears to be collecting the dividends of good governance, honest management and smart stock-and-bond picks.

As some of the nation’s best-known mutual fund companies go up in flames, Baltimore-based Price is burnishing an already superior reputation for fair dealing and good returns.

“I’ll eat this page” if Price, Vanguard or a half-dozen other well-regarded fund groups get caught up in the current scandals, personal finance sage Jane Bryant Quinn wrote in Newsweek a couple weeks ago.

Morningstar, the respected mutual fund research outfit, has repeatedly mentioned Price as a consumer-friendly alternative to companies accused of skimming profits from small investors. Last month Merrill Lynch upgraded Price’s stock to “buy,” reasoning that the Baltimore outfit stands to benefit from the skulduggery of its rivals.

“At least we won’t cheat you” is not a ringing ad slogan, but that’s what seems to be working these days in mutual funds.

Almost every day lately, says Debbie Ferrara, receptionist at Price’s downtown investment counter at Calvert and Lombard, people have walked in to dump Janus, Putnam, Strong or other tarnished financial families and buy Price funds.

“Even though they may not see it in their accounts,” she said of the pennies on the dollar skimmed through rapid trading at other firms, “they read about it in the papers.”

T. Rowe Price Investment Services had $106 billion under management at the end of October, about $26 billion more than it had a year earlier, according to Financial Research Corp. And more than $7 billion of that was new money, although Price says it doesn’t track how much came from shamed rivals.

For years, Price has had the kind of governance and trading controls that other firms are talking about implementing or improving.

Price employees are subject to the same restrictions as outside customers: no rapid trading, which saps fund assets with high transaction costs, no “late trading” after daily prices are set and so forth.

And guess what? A recent review shows nobody broke the rules, says company spokesman Steve Norwitz.

Eight out of 11 directors for each of Price’s domestic funds, and eight out of 10 for international funds, are independent of the mother company, an arrangement that discourages inbreeding and self-dealing.

When appropriate, Norwitz says, Price has long updated “stale prices” from its international funds so that sharp investors can’t make easy money on overnight developments.

Price also levies redemption fees to stop rapid trading on more than a dozen funds.

And, Norwitz says, the firm has banned big investors, including hedge funds such as the ones allegedly gaming Janus and Strong, that try to engage in sly in-and-out trades on funds with no exit fee.

“It’s happened many times,” he says. “We don’t have much of a problem anymore with hedge funds. It’s like the house that’s harder to break into. The burglar just goes somewhere else.”

And if that’s not enough, if you buy a Price portfolio and hold it, you might make some money. For the year that ended Sept. 30, 77 percent of Price’s funds beat their peers, according to Lipper. Over three years, 82 percent outperformed, and over five years 83 percent surpassed their rivals, Lipper says.

In the three-year period, a fourth of Price’s stock funds were in the top 10th of their categories.

For financial service companies, the past few years have been like an FBI entrapment operation or a high-stakes Candid Camera show. Chances for illicit millions were dangled on sticks while e-mail hard drives watched and subpoenas waited. T. Rowe Price appears to have passed.

—–

To see more of The Baltimore Sun, or to subscribe to the newspaper, go to http://www.sunspot.net

(c) 2003, The Baltimore Sun. Distributed by Knight Ridder/Tribune Business News.

JNS, TROW, MMC, WPO, MER,

Dec. 3–MONEY COMES IN EASY GOBS TO THE TRULY CLAIRVOYANT: Relying on nothing except your investment skill, economic knowledge and clairvoyant powers, you could have turned $25,000 into $2 millionthis year by market-timing Rydex Funds.

It’s Jan. 2, 2003. Knowing as you do that the Nasdaq will rise for a few days, you sink your stake into the Rydex Velocity 100 Fund, which doubles the gains and losses of the Nasdaq 100 index.

Boom. You’re up 8.6 percent in a week.

Suddenly you get a negative Nasdaq premonition. You shift everything into the Rydex Venture 100 Fund, which rises twice as fast as the Nasdaq 100 falls and vice versa. The index sinks, and you make 5.5 percent in a day.

Then you’re back in the Velocity Fund for a week. Up 10 percent before the market slips back, by which time you’re over in the Venture Fund again for a 17 percent gain.

A couple more double-reverses like this and you’ve got an 80 percent compound gain for the month. A few more months like January and you’re on your way to a life of worry-free idleness and debauchery.

What? You say mutual fund companies don’t allow such faithless flip-flops from people like you? You say they limit you to two or four switches a year? You say only huge hedge funds being investigated by Eliot Spitzer could (formerly) get away with this kind of market timing?

Check out Rockville-based Rydex Funds, where market timers snubbed by Vanguard and Fidelity are made to feel like Prince Bandar checking into the Four Seasons.

Most funds say they discourage quick in-and-out moves because rapid cash turnover can drive up administrative costs, lower returns for buy-and-hold shareholders and make life miserable for investment managers.

Not Rydex. There, the swashbuckling investor with at least $25,000 can buy a fund Monday, sell it Tuesday, buy it back Wednesday and so on, ad infinitum, with no penalty.

Many funds limit customers to a few investment-changes a year. Not Rydex, which advertises “unlimited trading privileges for most of our funds.”

Some funds charge a “back-load” sales commission if you withdraw your money before a certain date. Not Rydex, which collects no load on the front or the back of a trade.

Some funds, of course, that said they banned or limited market timers apparently didn’t. To lure big chunks of capital and maximize fees, they allegedly allowed select players, typically big hedge funds, to exceed trading-frequency limits.

This is the focus of much of the recent investigation by New York state Attorney General Spitzer and others. There is nothing wrong with market-timing per se. What’s wrong is pretending to limit it and then making exceptions for high-rollers.

At Rydex, there’s no such double-standard. Every client can be a mutual fund day trader. And many are.

“Only about 20 percent of our clients are active investors,” defined as people switching funds more than eight times annually, says spokeswoman Dawn Kahler. But, she adds, “some of those active investors trade every single day.”

Some more-passive Rydex customers use the funds to offset risks in other investments, officials at the decade-old company say. For example, those heavily into blue-chip stocks might hedge the bet by buying the Rydex Ursa Fund, which declines when the S&P 500 index rises.

Most Rydex funds are index-based, which gives the company leeway to handle market timing with more aplomb than actively managed funds can. Index-based targets mean that Rydex fund jockeys can hoist net asset values into the proper position using options, futures and other derivatives instead of buying individual stocks. Annual expenses are under 1.75 percent.

Whatever the attraction, Rydex is having “our most successful year ever,” says Chief Operating Officer Michael Byrum. Assets have risen from $6 billion at the beginning of the year to almost $10 billion, and as much as $3 billion of that is new money, not market appreciation, he said.

If you want to time the market, Rydex looks like a good place to try. The question is, why?

The market timers in Spitzer’s sights had a couple extras going for them. Not only did they rapidly move in and out of funds, but they often allegedly backdated trading prices, which allowed risk-free (and probably illegal) gains.

They also supposedly seized on overnight developments in Asia and elsewhere to make easy money in international funds whose prices weren’t updated until much later. (Rydex says it stymies this scheme by quickly adjusting international-fund values.)

With those advantages, they really were clairvoyant. You’re not.

—–

To see more of The Baltimore Sun, or to subscribe to the newspaper, go to http://www.sunspot.net

(c) 2003, The Baltimore Sun. Distributed by Knight Ridder/Tribune Business News.