“Financial planner Joseph Lyons recently moved client assets out of a Putnam Investments mutual fund whose manager allegedly made improper trades in its shares. Mr. Lyons didn’t move it out of the stock market. He chose another stock mutual fund, managed by Morgan Stanley,” writes Ian McDonald in today’s Wall Street Journal.

“Like many others, he wants to avoid funds tainted by the sprawling mutual-fund trading scandal that erupted in early September, but he isn’t giving up on stocks. It’s hard to resist a market that seemingly keeps going up. Enthusiasm for stocks pushed the Dow Jones Industrial Average through the 10000 mark Thursday, the highest level in 18 months.”

“After a family discussion of the issues, 43-year-old Mr. Lyons, who works with investment firm Linsco Private Ledger, in Walnut Creek, Calif., shifted his wife’s retirement holdings from several Putnam Investment funds to some Fidelity Investments portfolios. He’s out to protect his clients’ — and his family’s — interests.”

” ‘As long as the stock market is doing well, people will keep investing,’ says Steve Henningsen, a financial adviser with the Wealth Conservancy in Boulder, Colo. ‘It’s kind of weird this scandal hasn’t chased people from funds.’ “

“Although many irate individuals and institutions have unloaded holdings of funds run by Putnam Investments, which has settled federal charges in the matter, and Strong Capital Management, which is under investigation but hasn’t been charged with any wrongdoing, and other firms implicated in the scandal, money flowing into the fund industry as a whole has been surprisingly robust. From the start of September through the end of last month, stock mutual funds took in more than $63 billion, their highest three-month intake since early 2000 when stock prices peaked, according to flow-tracker AMG Data Services. This money has helped fuel the stock market’s rise.”

“A staggering 55% of it has gone to the country’s three largest fund firms as measured by assets: Fidelity Investments, Vanguard Group and American Funds. Even though the three fund groups together hold more than $1.8 trillion of the industry’s $7 trillion in assets, new money is coming into Fidelity, Vanguard and American at a markedly faster pace than usual. From 1998 to the start of this year, the three firms took in a little more than a third of the industry’s stock-fund flows.”

“While new disclosures continue to emerge almost daily in the investigations, Fidelity, Vanguard and the American Funds family run by Capital Research & Management have avoided allegations of wrongdoing in the scandal to date. And while many other firms also have a clean bill of health so far, it appears the industry’s Big Three in particular are benefiting from a drastic flight to quality in the fund world.”

” ‘These firms can portray themselves as being good money managers who put the customer first,’ says Charles Bevis, research editor at Boston fund consultants Financial Research. ‘They have a very persuasive message that other firms will have a hard time delivering to customers.’ “

“Some observers find investors’ reaction to the scandal news heartening. Rather than give overriding importance to the latest short-term investment returns, they appear to be casting their lot with companies that look to be more concerned about their current customers than prospective ones. ‘Maybe fund investors aren’t so dopey after all,’ says Russ Kinnel, director of fund research at Morningstar.”

“The upshot: The worst mess in the history of mutual funds has become a marketing opportunity for those firms still untarnished. As cash leaves implicated firms, fund executives at major firms say their salespeople are working fervently to attract money from investors who are eager to stay invested as the stock market is again pushing strongly higher.”