If you hold a mutual fund from a family that has admitted to wrongdoing, there are reasons to think about switching:
- Effect on fund managers. If the managers at your fund are thinking about defending themselves against possible lawsuits, they’re not thinking about picking the best stocks. In addition, top-performing managers at tainted families may get better offers elsewhere.
- Cash concerns. If managers expect heavy redemptions from unhappy investors, they may hold more cash than they normally do. Low-yielding cash is likely to reduce returns for long-term investors.
Alternatively, if the manager holds onto stocks but eventually has to sell some stocks to meet redemptions, there’s a chance the stocks will be depressed by the selling pressure.
- Extra expenses. There may be a “run on the bank” at accused fund families. If that happens, remaining investors might have to carry a greater share of the fund’s expenses.
- Lack of control. Repeated errors may be a sign that the fund company is not well managed.
