Mutual Fund Companies

April 17, 2002
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GRAND RAPIDS — While Congress and federal agencies take a hard look at Enron and Arthur Andersen for their roles in the country's most unsavory 401(k) debacle, few in the nation's capitol have even glanced at the part played by the mutual fund companies.

Many of the largest of these firms — such as Alliance, Janus and Putnam — held tens of millions of Enron shares at the end of the third quarter last year. Some even bought millions of shares for their mutual fund customers after Enron's shaky financial condition surfaced months earlier.

Houston-based Enron filed for bankruptcy on Dec. 2 of last year, a move that officially wiped out thousands of retirement plans and crippled many investment packages.

"Everybody knew. There was no question that Enron did some pretty interesting things with the numbers," said Eric Ericksen, an investment advisor who teaches finance at Grand Valley State University.

"Nobody could read the balance sheet. The analysts really had no idea how Enron made its money. But they didn't care, because as long as they could recommend it, they got their fees. So you would expect them to own the stock.

     "But the mutual fund guys, who also couldn't get their [Enron's] earnings," he added, "never should have owned the stock to begin with because they knew they couldn't get a good handle on Enron's earnings."

But own they did.

Alliance Capitol Management held 42.9 million shares as of last Sept. 30, after buying 17.7 million shares just months before Enron filed for bankruptcy. Records from that date also showed that Janus Capital owned 41 million shares.

Putnam Investments owned 23 million. Fidelity Bancorp owned 20.8 million. Smith Barney had 19.5 million. State Street, Morgan Stanley Dean Winter, Northern Trust and others also bought big blocks of Enron stock for their customers.

"You don't expect anyone else in this universe to be on your side. But you do expect the person you hire, or that you pay a management fee to, to act in your best interest — and they didn't," Ericksen said of the mutual fund companies.

"They're bright people, they really are," he said of the fund managers who closed an eye to Enron. "But in my viewpoint, they simply lacked the strength of character to stay away from a hot stock."

Ericksen felt these companies should have had an inkling last spring that Enron wasn't being candid about its fiscal situation. At a shareholders meeting in April, a money manager asked an Enron executive for something that stockholders are usually given — a balance sheet. What he got instead was a very unusual response to his request.

"A corporate executive swore at him and didn't give it to him," said Ericksen. "You can find quotes from analysts where they said they never could really get a handle on the balance sheet, on the assets, and so on.

"If you're the fiduciary and you can't get an accurate evaluation, you shouldn't be buying for your clients. That is just simply the way the rule is."

The fallout from the Enron scandal had investors shying away from corporate buys a few weeks ago, making it tough for public companies.

Federal regulations limit what a corporate executive can say to reinforce investor confidence in a firm. So the best advice that Ericksen had for CEOs was to keep doing what the company does best, and not try to be something it isn't.

"I think the long-term successful companies are the ones that just focus on — as they used to say in the Super Bowl — what got them there," he said. "All they can do is to do what the company is supposed to do, which is produce quality products and services.

"Some companies get in trouble by attempting to be different," he said.

"Instead of trying to earn it the hard way, they try to be in focus with the media and financial people by having a new product, or a new way of looking at business. There are very few new ways to run a business."

Ericksen didn't call for a federal investigation of the mutual fund companies because he felt the market will eventually punish those that bought Enron stock when they shouldn't have. And he said investors should know which stocks are in their 401(k) plans, stay away from mutual funds that contain dubious companies, and not believe everything they see on the tube.

"When the carnival comes to town it has those little ring-toss things. No one is going to win the big bear. We know that," said Ericksen. "But for some reason everybody watches TV and says, 'The analyst really liked it.'"

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