Some 2006 predictions for the fund industry

THE BALTIMORE SUN

I gave up trying to call the stock market for the year ahead in the late 1990s, when I got tired of being wrong.

But I still forecast the year ahead for the fund industry. Since I started doing it in 1995, about five of every seven have turned out right, with one forecast being just a bit early and the other being flat-out wrong.

There will be other hot news in the fund world this year, but here are a few of the stories - and non-stories - you're likely to see in 2006:

A change in market leadership.

The current three-year-old bull market seems to me to have the legs needed to reach age four, albeit not with any great speed during 2006. For the bull market to continue, however, there will have to be some change in the hot sectors, because a bull market can't be sustained indefinitely on the strength of energy, gold, metals and mining, and real estate.

If energy leads the way again in 2006, the bull market will be over by Thanksgiving. For it to continue, it will have to count on new industries taking the lead, particularly technology and health care.

Very little action from the SEC.

New Securities and Exchange Commission Chairman Christopher Cox is stepping back from the aggressive stance of Bill Donaldson, and it appears his agency - which is shuffling the personnel deck that oversees the fund business - will let existing story lines play out before creating something new and interesting.

The most remarkable thing you'll notice about the SEC was how it wasn't the center of any major fund story.

Merger mania, including at least one big name.

Investment businesses tend to peak in value as the stock market gets late into a good run; owners who can get a premium price now may decide it's time to cash out. Putnam, Janus and AIM are the most likely big-name merger candidates.

The approval of the independent-chairman rule.

If the courts strike the rule down, it will make an interesting test of which way the SEC is leaning under Cox - whether it is tilting toward the consumer or the industry. That said, if the courts rule against the independent-chairman rule, expect a new approach, one which requires either the chairman or the lead director to be independent. That would be enough to pacify most of the holdouts.

In 2005, Congress got closer to an acceptable fund tax-reform package than it has in the past. I'd bore you with the details, but the truth is that they won't matter until the government can get past bigger issues. That's not going to happen in 2006.

jaffe@marketwatch.com

Charles Jaffe writes for MarketWatch. He can be reached by mail at Box 70, Cohasset MA 02025-0070.

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