(August 4 16:20 ET) – The latest rash of trading scandals may have irreparably damaged the trust that investors have in active fund managers, says Duff Young.
Young, fund industry analyst and president of FundMonitor.com, said the scandals at RT Capital Management Inc. and the Transamerica Life Insurance Co. of Canada may have been the last straw.
“The Transamerica employee trading scandal has pushed investors’ attitudes far enough that we are in an entirely new
environment,” he said.
With investor belief in the superior stock-picking talents of fund managers already at an all-time low, the loss of faith in their integrity may be a cataclysmic event for active fund managers. “It’s enough to almost create permanent distrust,” Young said.
He also believes the scandals will spark an unfortunate regulatory
reaction. “Everybody loses,” Young said, speculating that the regulators will start coming down hard on the industry. Provincial regulators and the TSE have already demanded boxes of trading data from fund managers in the wake of the RT case, and the Financial Services Commission of Ontario is threatening a broad look at managers of segregated funds.
However, focusing on issues such as high closing are not a productive use of regulatory resources or attention, he maintains, suggesting regulators instead focus on more sophisticated monitoring of trading behaviour and governance weaknesses.
With poor performance and a bad reputation, active fund managers may not win their way back into investors’ hearts until the bull market crumbles and they are called on to preserve the resulting decay in wealth, he said.
-IE Staff