updated 2/6/2004 3:09:56 PM ET 2004-02-06T20:09:56

Net inflows to US mutual funds rose to almost $300 billion in 2003, the highest for seven years, as investors flocked back following the stock market recovery.

Despite the widening scandal over mutual fund trading abuses, the surge in new money continued in January with an estimated $40 billion flowing into equity and balanced funds, according to fund researcher Strategic Insight.

The figures suggest the scandal has had only a short-term impact on a few fund managers. More than 20 companies have come under investigation for allowing short-term traders to arbitrage fund shares at the expense of their long-term investors.

On Thursday, Massachusetts Financial Services, the U.S. fund management arm of Canada's Sun Life Financial, became the latest company to settle with regulators over alleged improper trading. MFS will pay $351 million — $225 million in restitution and fines, $125 million in fee cuts over five years and $1 million in investor education — in a deal struck with the Securities and Exchange Commission and Eliot Spitzer, New York attorney-general.

John Ballen, MFS's chief executive, and Kevin Parke, its investment chief, have been banned from serving as officers or directors of public companies for three years. MFS made Robert Manning its new chief executive.

Mr. Spitzer said investors had lost $175 million as a result of MFS allowing market timing of its fund shares. "Fees will continue to be a central part of our negotiations," he said. "A new fee structure is required and we will continue to scrutinize the fees of companies we are holding talks with."

Hinting at a settlement with the Canadian Imperial Bank of Commerce, which has lent $1 billion to hedge funds for market timing, Mr. Spitzer said the bank was "co-operating with my office and we hope to reach a satisfactory conclusion".

Hedge funds devoted to market timing had assets of $5.5 billion in September last year when Mr. Spitzer began his probe, according to Hedge Fund Research. However, $3 billion was pulled out of the funds after the scandal hit. Hedge funds following the strategy, which is not illegal, returned 15 percent for the year.

The inflows into mutual funds last year follow the pattern of retail investor money flowing back to the market after prices rise, despite losses many investors suffered in 2000. Don Cassidy, a senior analyst at fund tracker Lipper, said: "People don't have the guts to get in at the bottom. When we see things going well, that's when we want to jump in."

The total net inflow of $291 billion for 2003 was close to the record inflows reached in 1993 and 1997. In 2002, inflows were only $170 billion. Last year's inflows and the rise in the market took total assets in U.S. mutual funds to $7.9 trillion.

Copyright The Financial Times Ltd. All rights reserved.


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