Some New Year's predictions

THE BALTIMORE SUN

Recently, a reader sent me a quick note, asking for my prediction of what his fund is likely to do in 2005.

I said the fund "is likely to go up ... if it doesn't go down or sideways."

I'm not in the business of divining the future of individual issues, but each year at this time, I take a crack at predicting the big stories of the coming 12 months in the fund industry.

My selections may not be the fund world's only hot news, but I am confident that we'll see the following in 2005:

A failed underground effort by the fund industry to remove William H. Donaldson as chairman of the Securities and Exchange Commission.

Donaldson has spearheaded a number of initiatives that powerful fund chief executives dislike. Word around the business is that some of those top dogs are banding together to pressure President Bush to give Donaldson the boot, a move that would slow or derail regulatory progress.

It won't work.

Axing Donaldson at this point would send the wrong message to the investing public, and that's not the impression politicians want to give as they include individually managed accounts in their plans to overhaul Social Security.

High-profile regulatory cases against fund directors for allowing excessive management fees.

Regulators are looking at several firms over this issue, clearly hoping to send the message that ignoring what is best for consumers will not be tolerated. That message is doubly important with new rules requiring independent board chairmen taking hold in 2006.

Mutual fund tax reform stalls ... again.

In recent years, there have been several proposals to make the capital gains that a fund distributes to shareholders exempt from taxes. The idea that has gone farthest up the legislative pipeline would allow an annual exemption of up to $3,000 in gains per person.

At least two congressmen will reintroduce the tax cuts this year, hoping to get in the mix amid the Bush administration's desire for tax changes and greater savings incentives.

Alas, continued fund reform and bigger tax issues - plus the proposed overhaul of Social Security - will be the priorities, and the fund-tax proposals will get no real traction.

Another meaningful disclosure made meaningless.

Beginning March 31, in accordance with a new SEC rule, shareholder reports must cover "in reasonable detail" the big reasons why directors approved the fund manager's contract.

It should be an interesting statement - particularly for funds that are perennially below average - but it is likely to wind up muddled and unintelligible once fund lawyers finish with it.

The SEC could battle to exclude the jargon and boilerplate, but won't.

Meaningful actions stemming from that meaningless disclosure.

Even if the boards don't say much, the mere act of speaking out will force directors to guard against being sued.

The likely result is that some boards will merge or liquidate rather than continue operating a laggard fund; that's a positive step, even if the disclosure goes largely ignored.

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