Trading scandal prompts rush to opportunistic ads

Get ready for the soft spin.

With regulators, legislatures and even some investors questioning the integrity of the $7 trillion mutual fund industry, some fund companies are wasting little time positioning themselves as model citizens.

In recent weeks, fund companies such as T. Rowe Price Associates Inc., OppenheimerFunds Inc. and American Century Investments have run advertisements touting the uprightness of their firms or their firms’ investment processes.

Such ads are likely to proliferate in the weeks and months ahead, say industry experts, who consider some of them a clear reaction to the mutual fund trading scandal as well as to the earlier brouhaha over the lack of veracity of Wall Street research.

While no fund company will admit it, the ads are also aimed at scooping up assets at a time when many investors are rethinking their mutual fund investments, say experts.

“They are definitely being opportunistic,” says Dan Sondhelm, a partner at SunStar Inc., a financial marketing firm in Alexandria, Va. “There’s a lot of money in motion, and these companies know that it has to go somewhere.”

Consider, for example, an ad run by Baltimore-based T. Rowe Price.

The headline reads: “T. Rowe Price gives the interest of its customers – individual investors – the highest priority.”

The ad goes on to say: “Doing what’s in the best interest of our clients is nothing new. It was a founding principle in 1837 and still holds true today.”

In another recent ad, New York-based OppenheimerFunds subtly suggests that investors won’t be hit by any surprises.

The ad reads: “Our portfolio managers have been so predictable, it’s almost boring. Isn’t that exciting?”

Gregg Wolper, a mutual fund analyst at Morningstar Inc. in Chicago, says fund companies are likely to launch more character-touting ads in the months ahead.

“It does seem like some fund companies are shifting to ads that focus more on integrity,” he says. “I think many of these companies sense there is some doubt over the integrity of mutual funds, and they want to reassure investors that their particular company is trustworthy.”

The shift comes just as many fund companies were beginning to go back to their old practice of hyping the short-term performance of their funds (InvestmentNews, July 28).

It also comes as fund companies continue to cut their ad budgets. Year-to-date through Sept. 31, mutual fund companies had spent $83.7 million on advertising, down 16% from $99.7 million during the same period in 2002, according to Competitrack Inc. in New York, which tracks advertising.

By contrast, fund companies spent $356.2 million on advertising in 2000, compared with $266.2 million in 2001 and $134.7 million in 2002, Competitrack says.

Risking Trouble

Still, those who hold themselves too highly above the fray are playing a dangerous game, experts say.

By promoting their own integrity, fund companies run the risk of setting themselves up for even greater trouble should they suddenly find themselves accused of wrongdoing. If that were to happen, those companies would then have to deal with the perception that they deliberately lied as well as with being implicated in some illegal or unethical activity.

“It would be a real double whammy,” says Thomas Smythe, assistant professor of economics and business administration at Furman University in Greenville, S.C. “These fund companies are going to be under intense scrutiny. In the grand scheme of things, they could be accused of something that is a pimple. But the investing public is not going to see it that way.”

Companies that promote their virtues too aggressively are also taking a chance that they might be perceived as kicking their competitors when they are down. Even though gathering assets is the name of the game in the fund business, no one wants to be looked at as a bully.

“It just doesn’t feel right to trample over the graves of others,” says Sean Hagerty, a principal who oversees marketing at The Vanguard Group Inc. in Malvern, Pa. “Besides, we find the investing public is a little skeptical right now.”

He says that Vanguard has considered playing the trust-and-integrity card in its ads. But its own research shows that such a message “doesn’t resonate” well with investors.

“That is something people want to feel we’ve earned,” Mr. Hagerty says. “They don’t want us to tell them that we are trustworthy.”

Then there’s the risk of calling too much attention to oneself.

Brian Sullam, manager of editing services in the retail-marketing group at T. Rowe Price, says his company is likely to avoid any direct mention of the scandal in its ads. Instead, it will continue to focus on its reputation and on the overall performance of some of its funds.

“I don’t know how many people are aware of this mutual fund scandal,” he says, “but we’re certainly not going to spend our precious dollars calling attention to it.”

Meanwhile, the scandal has caused Janus Capital Group Inc. to pull the plug on its plans to launch an advertising campaign.

The Denver-based company, which was one of the first to be implicated, has postponed plans to unroll what was to have been its first television campaign in three years. The campaign, which was supposed to have been rolled out last month, is part of a larger effort to build brand awareness.

“We look forward to the return of our business as usual and are anxious to re-emerge more visibly when the timing is appropriate,” Janus’ chief executive, Mark Whiston, said in a recent conference call with analysts.

A spokeswoman for Janus declined to comment on when the company might launch the television campaign.

But Janus shouldn’t wait too long. With many fund companies cutting back on their advertising, now is the perfect time to pull ahead of the pack, says Tom Dougherty, a senior strategist for Stealing Share, a brand consulting firm in Greensboro, S.C.

“The time to do your best is when your competitors are all slowing down,” he says. “Change is your ally when you are trying to steal share.”