Mutual Funds: Skedaddle Time?

Investment adviser Michael Zabalaoui of Metairie, La., has been putting clients' money in Janus mutual funds for over a decade. But with the Denver firm tainted by the spreading trading scandal, he has pulled at least $15 million out of Janus funds because, he says, he no longer trusts them.

Zabalaoui's not alone. Although Janus says questionable trades were limited to a few employees no longer with the firm, in September, investors yanked more than $4 billion out of Janus, says AMG Data Services. What's more, Morningstar, the fund research firm, recommends selling or at least not putting new money into firms at which trading misdeeds are suspected. That includes Bank of America, Bank One, and Strong funds. Morningstar also put a sell on Alger Funds, where a top official pleaded guilty to obstructing the trading probe. As for Putnam, Morningstar says it's studying the situation.

Such redemptions could be costly for those who stay. When managers sell stocks to meet redemptions, they may drive up trading costs. Those costs eat into returns, which, are already poor for many of the funds being probed.

For those leaving, the tax implications shouldn't be tough. Most of the funds named have large tax losses on the books, so sales to cover redemptions won't bring capital gains. And those who bought late in the bull market will likely sell at a loss.

By Lauren Young in New York

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