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Friday, November 21, 2003
More Fund Follies

I'm happy to see that my gift for prophecy is still working. Larry Lasser lasted less than a week after the expression of confidence by the board of directors.

Putnam is now joined by Fidelity, MFS, Scudder, Hancock, Loomis Sayles, and Pioneer.

There is a new issue here as well: directed brokerage. This is a system in which a fund sponsor asks a broker to push their funds in return for a larger share of the funds' portfolio trades. In effect, a marketing expense is turned into a cost for the shareholders. There are a lot of familiar names in this new investigation. MFS has already announced it will suspend the practice, which is not illegal and is disclosed to shareholders.

Directed brokerage may not be the only kind of dangerous liason in the fund industry. It would be interesting to see how fund sponsors deal with relationships with their other vendors, customers, and distribution channels. Do they have a control for their executives owning shares in their vendors, for example? At what level do the traditional perks and "gimmes" rise to the level of corruption? Golf? Golf clubs? A vintage Corvette? A rate break on a mortgage?

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