what if the mutual fund company goes belly up

If company XYZ is in trouble then it or its funds will most likely be taken over by another mutual fund management company.

You might want to consider another question: "What happens to my money if fund ABC invests in overvalued assets?". To find the answer to that question Google on the search words: heartland high-yield municipal bond fund .

Your assets are being held by an independent holding company.

While it may not look this way, from a legal perspective Company XYZ is just a money manager that's been hired by the board of directors of Fund ABC to run the mutual fund. Fund ABC's assets are kept completely separate from Company XYZ's assets. So if Company XYZ goes out of business it should have no effect on the assets of Fund ABC.

This is why you never see mutual fund failures, it really can't happen. They can be unsuccessful and perhaps need to change names or merge into another mutual fund, but you're not going to pick up the paper tomorrow and see that your mutual fund was now worth zero because the fund company filed for bankruptcy (as could happen with an individual stock).

As others have posted the much greater risk is that Company XYZ simply does a lousy job managing Fund ABC, and you lose money that way -- from investment losses.

-Tad

Hmm. People are saying that mutual funds are super safe, even if disaster strikes the companies running the funds. The en masse failure of the Savings and Loan Associations back in the 1980s comes to mind. People at that time believed those associations, like banks, to be safe no matter what happened to the economy. The impression I am getting by reading this thread is that people now believe mutual funds to be even safer than banks and savings institutions.

Well, comparing banks and mutual funds are comparing apples and oranges.

Your bank deposits are a direct obligation of the bank. And your deposits (in excess of insurance) are totally at risk if one single company (the bank) fails.

Your mutual fund holdings are a direct obligation of the *fund*, but not of the *fund management company*. The *fund*'s assets are held at independent custodian banks.

As Tad said, the fund is a separate legal entity from the fund manager and the fund manager is hired to run the fund. In theory, even a fund that's part of a fund family can choose to hire any manager it wants. So in theory, some Fidelity fund could go maverick and hire an American Funds manager. In practice, the so-called "independent directors" aren't and would therefore never pull a stunt like that.

So the previous posters are correct -- the failure of the *fund management company* won't affect the value of your *fund* holdings one bit. And even within the fund itself, it would be very, very hard to lose everything, since all the companies the fund is invested in would have to fail.

Though there is the issue of what happens if the custodian bank fails. Perhaps nothing, if all the custodian bank is doing is physical storage and back office services for the fund and doesn't have the fund's securities in its own street name. But it would be interesting to know what, if any, protection a fund (and its shareholders) has against failure of the custodian bank.

I think you need to go back and re-read this thread because no one has said anything like mutual funds are super safe. They are saying that whether the fund is successful or not is independent of whether the management company makes a profit. The mutual fund you purchase may invest in unsuccessful companies and therefore itself be unsuccessful - or vice versa.

Elizabeth Richardson

You are comparing apples and oranges.

What's safe is your ownership of the assets held by a mutual fund. The assets themselves may suck (ie. a company whose stock is in a fund may go bankrupt and the fund thereby will lose money). But the mutual fund management company has no claim on those assets and if the management company goes bankrupt, the assets remain owned by the shareholders in the fund.

Banks were nothing like that. Banks borrow money from depositors. Mutual funds do not borrow money from the investors who buy shares.

(Of course, some mutual fund *management* companies are in fact public and you can invest in them - but that's entirely different from buying shares in a fund)

Investing in, say, equities, via a mutual fund is no less safe than investing in equities by buying them directly (minus a management fee, but plus having someone else take care of specific decisions and diversification for you).

Let's take a less risky example - say, a US Treasury-only money-market fund. When you buy shares in it, you are buying short-term US Treasury securities. The management company takes a small slice of the interest (well, hopefully a small slice - some are rip-offs), but you, the shareholder, do not own the mutual fund management company. You own US Treasuries. If the fund company goes under, either your Treasuries are sold and you get the proceeds, or another fund company comes in, as explained elsewhere, and continues managing your portfolio of US Treasuries for you. Either way, you own the underlying securities - in this case, US Treasuries - not a fund management company. Your risk is whatever risk is involved in the underlying securities. In the case of US Treasuries, well, if they default, chances are you have something else to worry about already...

Anyway, "safer than banks" in the context you've placed it above is entirely meaningless. You neither define "safer" nor does it acknowledge that you are comparing apples and oranges.

The usual aphorism still holds - dotn invest money in the market you cant afford to lose.

rick++ wrote on [Thu, 26 Apr 2007 17:08:47 -0500]:

That doesn't make much sense, at all.

Why are all these retirement plans, which people really can't afford to lose, invested in the market?

I understand that mutual funds are safe only to the extent the stocks held by the funds are safe. I am curious as to whether or not investors in the funds would lose money if, because of some widespread economic disaster, many mutual funds went out of business all at once.

Thanks. That helps clear it up for me. But I still have a somewhat uncomfortable feeling, because everybody thought all was well with the Savings and Loan Associations, and still the government had to intervene to make good the obligations.

Tad

Presumably if a mutual fund entered into the (wrong) option or derivative contracts, it's value could drop to zero? That would be as close to 'going bust' as any insolvency?

Not also for any browser. Closed End Funds (investment trusts in UK parlance) which use leverage (borrowing) *can* go bust, and from time to time do: the UK had something called the 'split capital trust fiasco' (google it) which was about CEFs launching different classes of shares (to give some groups of investors higher income), and it eventually all unravelling.

erratum: Note not not ;-).

Closed End Funds (investment trusts in UK

Now that I think of it, this is also how the crash of 1929 kicked off. There were a series of leveraged CEFs ('trusts') that held high paying shares (like utilities) plus debt. Hence giving geared dividend returns. Goldman Sachs was prominent in promoting at least one.

When the market slipped, the equity value of the shares fell, and eventually they had to liquidate to pay off the debt. Investors were left with nothing (or near as).

The Investment Companies Act was enacted by Congress in response to this debacle.

See also Bernie Cornfeld and the IOS in the early 70s, one of the first international stock mutual funds (and a complete scam, Cornfeld was running a ponzi scheme).

There are disturbing resemblances between (some) hedge fund strategies and the strategies of investors during the 1928-29 period. And other similarities between the US now, and the US during that era: thinking F. Scott Fitzgerald and The Great Gatsby.

This same distinction is worth keeping in mind when comparing fixed and variable annuities. Fixed annuities are like bank deposits (in excess of insurance) - your annuity is no more safe than the company issuing it. But the variable accounts are like mutual funds - segregated from the debt of the issuing company (so creditors of the issuing company can't go after the assets if the company fails).

"Never" is such a harsh word :-). Let's say ridiculously infrequently.

Navellier Aggressive Small Cap Equity Fund fired Louis Navellier, went out and hired MFS Investment Management, and renamed the fund MFS Aggressive Small Cap equity. (A few months later, Navellier won a proxy battle for the board, and the new board hired Navellier back.)

The Japan Fund was managed by Scudder for many years. Its board fired Scudder, hired FMR (Fidelity) to manage the fund, and yet a third company - SEI - to distribute it (sell, do bookkeeping). Mark Freeland snipped-for-privacy@sbcglobal.net

Thank you! Helpful distinction to keep in mind.

Interestingly, in the UK this happens all the time, although primarily in the investment trust ('Closed End Fund') world. Because the directors are de facto (and de jure) directors of a quoted (listed) company, investment trust directors take their responsibilities to shareholders quite seriously.

In unit trusts ('mutual funds') the normal practice is to merge a failing fund into something bigger, that is more successful, thus removing the bad performance record from the family tree. If only one could do the same with troublesome relations ;-).

bookkeeping).

My own view is that one really has to pay close attention to who is managing a fund, within an organisation? Is it the same fund manager, or is it a team, and do they stick to a winning style or method? For that reason, if one is choosing active management, I tilt towards small, entrepreneurial fund management companies, over the 'stable (or staple) funds' of large congolmerates.

I'm not aware of any mutual fund (legally: "investment company") that has that kind of exposure to derivatives. I think it would be hard to, without running afoul of the Investment Company Act's restrictions regarding diversification, leverage, etc.

I can think of one similar example though...the Refco fiasco and resulting illiquidity in some commodity-futures betting pools...uh...trusts, such as JWH Global Trust. That wasn't a mutual fund though and the same type of failure wouldn't be possible for a fund whose securities were held through DTC. And supposedly investors are going to be made whole, eventually, at least with respect to Refco-related problems.

I'd definitely look at the limitations put on the managers for any fund or ETF that seems likely to use derivatives and leverage -- for example the ones that provide, you know, 2X the upside/downside of an index. For your garden variety stock or bond fund this issue just wouldn't come up.

-Tad

There was this one:

ProFunds UltraOTC which seeks to return 200% of the Nasdaq-100. In the space of one year, it lost - get this - 92% of its value. $10,000 invested at the beginning of Q200 was worth $700 at the end of Q101. Its worst 3-month period cost investors over 65%.

This was done partially with direct investments in stock and partially with derivative instruments.

FWIW, though, the fund didn't rip anyone off. It did *exactly* what it was supposed to do - the index it tries to double - the NAS100 - did *miserably* during those periods of time, too.

As we discussed, the underlying assets of a fund - which are owned, thereby, by the shareholders - may lose value - without the fund (management company) either failing, ripping anyone off, or losing the money itself. In fact, this particular fund is still in existence and active.

FWIW.

On May 1, 10:27 pm, Tad Borek wrote: mitations put on the managers for any fund

Thank you for the further explication.