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Market Timers and Fund Managers Plan Talks


While some mutual fund managers believe market timers frequently run amok, one group of registered investment advisors who call themselves timers are willingly setting their own limits on moving assets in and out of mutual funds.

At an April 28th board meeting, members of the Society of Asset Allocators and Fund Timers voted to impose a two-year-old set of practice guidelines on new members who join the group. All new firms seeking membership will have to read and initial the guidelines.

"One of the reasons for asking new members to adhere to the guidelines is to deter those whose practices are in stark contrast to the suggested parameters of SAAFTI," said Carolyn Mertens, an advisor with R.M. Leary & Co. of Denver and chairperson of the society. The society, founded in 1989, has 170 members, most of whom are investment advisors, who adhere to a timing or asset allocation philosophy. Members manage a collective $14 billion in assets.

The five guidelines in the non-profit organization's "Fair Practices Policy" have applied to existing members since they were unanimously adopted in May 1997. Before then, no formal best practices existed but many of the group's members were already adhering to their own set of common sense rules, said Mertens.

The professional guidelines spell out "best practices" which make sense in light of the relationship between investment advisors and the mutual funds they do business with, said Peter Mauthe, an investment advisor with Trendstat Capital Management in Scottsdale, Arizona.

The society's Fair Practices Policy, for example, asks members to provide at least some advance notice of asset shifts to mutual fund companies, suggests members fully comply with timing policies set by individual fund groups and urges them to keep channels of communication open between themselves and fund managers.

"The time has come in light of the sophistication and how big the industry has grown to act in an intelligent, fiduciary way for clients and the mutual funds we work with," said Mauthe.

Still, there is room in the guidelines to allow timers to tailor standards to suit them and negotiate over them with fund management, said Mauthe.

For example, though the society's policy urges timers not to control more than five percent of any one mutual fund, a higher percentage is acceptable if both timer and fund executives agree to the arrangement.

Some timers have, of course, clashed with some fund managers, each asserting that they are acting in the best interest of investors.

"Timing the market in recent years hasn't had friendly connotations to portfolio managers," said Sondra Purcell, CEO of Purcell Advisory Services in Tacoma, Wash. and a society member. The key to uniting the two factions is communication, she said.

One of the goals of the society is to encourage fund management to work with the organization in developing policies and publicizing funds' trade restrictions.

"It is vividly clear that 80 percent of the area of conflict between an advisor and mutual fund comes down to communication," the society says on its website.

Society members say they have no objection to working within the framework that fund advisers set to prevent fund operation problems. The challenge is getting advisors to commit to concrete written policies as to how many trades are allowed, limitations on trade amounts and under what conditions transaction fees will be levied, members say. Part of the challenge is gaining agreement on precisely what constitutes "market timing," said Mertens.

Some fund advisers openly ban timers from buying their funds and that is acceptable to society members who say they are content to confine their client's investments to those funds that embrace timers. Those funds include the Rydex, ProFunds and Potomac fund groups. But often, fund advisers allow timers access to funds and then scrutinize every move, or worse, change the rules in midstream.

"Changing the rules is disruptive to the relationship," said Mauthe.

Undeterred by such actions, the society is having its third meeting with fund managers just before the start of the ICI's General Membership Meeting in Washington, D.C. this week. Society members will meet with fund company representatives to discuss their differences and possible solutions. The two groups first met during the Schwab conference in Orlando, Fla., in November 1998 and then again at the Waterhouse conference in San Diego, Calif., this past February, said a society spokesperson.

Topics of discussion will include how to track the movements of market timers in a centralized database to which both fund management and fund timers could supply information. The society is also considering developing a market timer rating system. A single assigned number would allow fund managers to determine the frequency of an adviser's trades. The question of how to discipline those who do not adhere to the group's Fair Practice's Policy will also be discussed, said Mertens.