Investment: Funds Under Fire

Spectators at a Senate Banking and Currency subcommittee hearing can ordinarily be seated comfortably in a space the size of a legislative pigeonhole. But not last week, when sessions started by that subcommittee became the capital's top summer attraction, with S.R.O. crowds. At issue: Securities and Exchange Commission charges that the U.S.'s huge mutual-investment funds have overcharged their customers in the process of becoming a $40 billion industry that can reverse the direction of the stock market at a rumor's notice. Thus, the fortunes of millions of people could be at stake.

Offering broadly balanced, closely managed stock and bond portfolios, the mutuals appeal mostly to those who, for one reason or another, have neither the time nor the know-how to call their own investment shots. The returns to the customer have been handsome: an average of more than 10% a year over the past decade. But during that same period, stock values have soared by much more. And it was the contention of SEC Chairman Manuel Cohen, a leadoff witness at the subcommittee hearings, that "the high cost of mutual-fund investment management tends to place the mutual-fund investor at a disadvantage." Witness Paul Samuelson, one of the U.S.'s most influential economic theorists, went even further. A highly successful investor himself, Samuelson called into question the wisdom of the mutuals in their stock purchases. Said he: "I feel that the fund administrators provide investors nothing that they could not gain by throwing darts and hitting random stocks."

Samuelson was probably ranging beyond the scope of the Senate subcommittee, but the SEC charges went far enough in their own right. The commission's three main complaints: ∙MANAGEMENT FEES. These amounted to $140 million last year and, said the SEC's Cohen, have brought "unparalleled prosperity" to fund managers. Individual incomes of over $100,000 are commonplace even with second-level fund officials. The SEC urges that the Investment Company Act of 1940, which states that fees shall not be "grossly excessive," be changed to read that fees must be "reasonable"—and provide for enforcement of that standard in court.

Testifying for the mutuals, Investment Company Institute Chairman Francis S. Williams, spokesman for the industry, insisted that any such legislative change would subject the funds to a flood of shareholder suits. Also, said Williams, the SEC proposal would "institute Government control over the price and profits of an intensely competitive industry."

∙SALES CHARGES. The mutuals impose commissions ranging from 7% to 9% on customers buying shares in the funds. According to Cohen, these charges are used to support an "inefficient, oversized distribution system that uses manpower lavishly and indiscriminately." The SEC recommends that a limit of 5% be placed on sales charges—and even that would be five times the nor mal commission for making sales on the New York Stock Exchange. Retorted Williams: "Under the reduced com mission, retail salesmen simply could not afford to seek out, inform and educate the small investor about the unique advantages of mutual funds."