I have always just indexed and still indexed, so I am just ignoring all of this stuff.

I have to disagree with both of your points/critiuqes of Mr. Markman. I'm no fan of his work - I rarely read it - but I think you are a bit naive as to the realities of the mutual fund business. The reason why Lasser was paid so much had nothing to do with performance. The mutual fund industry is all about growing assets under management - not performance. Broker Dealers and Brokers are paid handsome sums of money to place "business" with commissioned fund companies like Putnam, MFS, Alliance, etc... Most of these compensations (bribes?) are never disclosed to the retail investor who places their financial life in the hands of a "trusted advisor". The fact is that Lasser made so much money because he helped increase assest under Putnam's umbrella - and that was done through some seedy arrangements that would equate to payola in the broadcasting business.

As to your second point- would you find it fair to sit at a blackjack table next to someone who was allowed to place the amount of his bet after the hand is over? What if as a result of this "advantage" for that player the house was only willing to pay you even money on blackjack instead of the customary 3-2 odds? The fact is that the behaviour of those involved was fraud - period. And that fraud resulted in additional expenses for remaining shareholders, which is a direct erosion on returns.

Finally, this is just the beginning IMO. There will be many more rocks over turned and bugs to crawl out. We also have another bubble induced fraudulent industry developing in the mortgage industry. That industry is now where the mutual fund business was in 1999-2000. Talk to any mortgage broker and appraiser to find out what I mean.

Your second point is incorrect. Let's take an extreme, hypothetical case. The case starts with $1 million in the fund and 1000 investors each with $1000 invested. The fund gets marked to the 4:00 close and at that price is worth $1 million. Great news comes out at 4:05 (Bin Laden and Hussein simultaneously captured). The S+P futures contract rises 10% immediately. The fund is now worth approximately $1.1 million (to make a better guess we would need to know more about the characteristics of the fund; regardless, the fund is certainly looking much higher.) The stock prices the fund is marked to, however, haven't changed; the fund (looking only at the NAV) appears to still only be worth $1 million. Only tomorrow, when the stock market opens again, will the Net Asset Value of the fund rise and each investors piece will rise from $1000 to $1100. The fund, however, made a deal with a hedge fund to late trade on the closing prices. The hedge fund puts in $1 million and now owns 1/2 of the fund. The fund, of course, can't invest this in the stock market (at this point, 4:00 prices are meaningless) so the fund goes into the next day with $1 million in cash plus stock that our best guess is worth $1.1 million. When the market opens the next day, the stock rises by 10% like we guessed, and the fund uses the cash to buy another $1 million in stock. The fund is now worth $2.1 million; half of it is owned by the hedge fund, half by the original investors. The hedge fund made an immediate 5% profit; each of the original investors has $1050 instead of $1100. The hedge fund has been allowed to steal $50000 from the original investors.
Now this is extreme (10% is, of course, an enormous move in the S+P future after 4:00) but smaller versions of this happen every day. I think a reasonable way to describe this is that the investors in the fund were forced to take "the other side of a loaded transaction."

industry insider here.

most of the stuff here and in the popular media is off-the-mark.

1. Lasser was paid handsomely for taking Putnam from a no-name mutual fund complex with $10 billion in assets to a top-five industry position with some $200 billion + in assets. It's that simple, and it didn't happen overnight and btw Putnam regularly wins top industry awards for customer service (ie, Dalbar).

2. Putnam Funds over the past 5 years have been terrible performers. Looking at the median fund return over 5 years versus the S&P 500 index tells you nothing, absolutely nothing. The Putnam equity fund managers got quite caught up in the internet dot.com bubble and did very well in 1998 and 1999 but then after the March 2000 peak results turned consistently disastrous.

3. Late trades are a very small part of the scandals. The scandals basically revolve around the fact that the pricing of all mutual funds are estimates based on the last trade of the securities held by the fund. If every security in a fund had a nice-sized fair trade at 4 pm EDT every day there would have been almost no scandal. But small stocks in the US trade infrequently and created a few opportunities in small cap mutual funds for "gaming the NAVs" and the problem was and is much worse in international mutual funds where important holdings trade in different time zones all over the place.

industry insider here.

most of the stuff here and in the popular media is off-the-mark.

1. Lasser was paid handsomely for taking Putnam from a no-name mutual fund complex with $10 billion in assets to a top-five industry position with some $200 billion + in assets. It's that simple, and it didn't happen overnight and btw Putnam regularly wins top industry awards for customer service (ie, Dalbar).

2. Putnam Funds over the past 5 years have been terrible performers. Looking at the median fund return over 5 years versus the S&P 500 index tells you nothing, absolutely nothing. The Putnam equity fund managers got quite caught up in the internet dot.com bubble and did very well in 1998 and 1999 but then after the March 2000 peak results turned consistently disastrous.

3. Late trades are a very small part of the scandals. The scandals basically revolve around the fact that the pricing of all mutual funds are estimates based on the last trade of the securities held by the fund. If every security in a fund had a nice-sized fair trade at 4 pm EDT every day there would have been almost no scandal. But small stocks in the US trade infrequently and created a few opportunities in small cap mutual funds for "gaming the NAVs" and the problem was and is much worse in international mutual funds where important holdings trade in different time zones all over the place.

I'm assuming that most of the readers here haven't read my site enough to realize that I am a former stockbroker (still very much in demand - I've got two offers on the table from very respectable Wall Street firms). Along with handling trades for clients, I was also one of the front line people who would handle most small trade disputes or would determine that they needed to be sent up the line. As a result of that trade support component of my job as a senior broker at my firm, I became intimately familiar with market mechanics, including the arcana of mutual funds.

What I'm seeing here in the comments are generally disputes over things I never said.

Anarchus is right on with his comment #1. Lasser was compensated for taking Putnam to a much higher level than it had been at. And his compensation was based primarily on the growth in assets under management.

I never defended, or attempted to defend, his compensation based on the fact that he "beat the market." Mr. Markman was implying with his statement "He certainly didn't make that by enriching his retail customers" that Mr. Lasser deserved less money due to underperformance of his funds. My point was to point out that while the 0.6% number was low, it was higher than a broadbased market average (the S&P 500) that covers most industries. I could have used the Wilshire 5000 and the point I was trying to make would not change. The Putnam funds did not grossly underperform like Mr. Markman was implying. They were, for all intents and purposes, a market performing fund family. Yeah, you can pick a few funds that outperformed and a few that underperformed. But again it misses the point. 0.6% was not a shameful number for that particular five year period, dot.com indulgence or not.

Mike, you have a wonderful theoretical argument, but it is just that, theoretical. It completely ignores reality.

The median mutual fund has total net assets of $282.5 million (bottom page 7). That means that the $1 million hedge fund "investment" (which is the number that I've seen bandied about in the press other places, although I do not have links there and cannot vouch for the accuracy of the numbers) would represent 0.353% of the total assets. Looking at your example of a 10% move followed by a million dollar illegal trade we come up with the effect on the other traders being 0.9%($282.5 + 10% = $310.75 or a pure 10% gain, adding the million dollar hedge fund on both ends assuming no gain on that money would be $28.25 (the original gain which stays unchanged)/$311.75 or 9.1%, a 0.9% difference in price) or $9.00 for the $1000 investor.

Now that is still a real loss, yes. But it is not taking the other side of a loaded trade. The investor who bought months or years ago has not had his position change a whit. There was no "trade" to create the shares for the hedge fund. They just are.

Rather, to write off the difference, the fund company is going to write it off as a "trading error." Usually by doing so, they'll dump it to a master account for the firm, which then gets computed as an overhead cost, which then gets figured as part of the operating expense, which is where it really costs the other investors money.

The other factor that was ignored was the offset by redemptions. Mutual funds are not static with but a single investor trading one trade on a single day with everything else staying static. People are redeeming shares, buying shares, trading shares from one fund to another, things are always in flux. As a result, most mutual funds sit on quantities of cash to cover the daily redemptions. It may very well be that the million dollars of hedge fund money kept the fund company from having to sell some hot stock to free up money.

Everyone is right, the late trading does give some people an unfair advantage, which is why it is illegal. But the real beef is with the fund companies themselves, they were the ones that breached the fiduciary duty to the investors, not the hedge funds. They knowingly allowed a practice that cost other investors through higher operating expenses, that is the real crux of the problem here. They participated in the manipulation of the system for the benefit of a few chosen people.

The fund companies absolutely need to be punished for their indiscretions, but what the market does not need is people "piling on" charges backed with manipulated statistics and incorrect statements.

And James, what you described was the system under which certain firms get compensated, the 12b-1 fees, particularly by no-load funds. With loaded funds the primary determinate factor in where the money goes will be the payout from the mutual fund companies. Companies with 5.5% A share loads will garner a whole lot more money than ones with 4% loads as the ultimate payout to the broker is higher. The way the 12b-1 fees are used is a dirty little secret of the industry and one to which more light should be directed, but I think that's a post for another day.