For years investors and market cheerleaders perceived the world through the filmy lens of a factitious bubble, a bewitching worldview that reflected a desire for perpetual growth rather than fundamental realities. Although the carnage suffered by the financial sector took on an almost surreal quality in the afterglow of this bubble mentality, there’s little question that the events of last year inflicted very real damage to investors’ psyches and wallets.

 

While the massive selloff in equities markets and falling home prices conspired to shrink the investing public’s overall wealth and confidence, the Madoff scandal and a host of well-publicized ethical failings have added an element of distrust to an already volatile situation.

 

The mutual fund industry hasn’t been immune to these challenges.

 

Money management companies have come under increasing pressure after the market meltdown hit asset values and precipitated a wave of shareholders redemptions; $234 billion worth in 2008 according to the Investment Company Institute.

 

As rampant losses and pervasive fear have reduced assets under management, earnings have dropped industry-wide. Fund managers generate much of their profits from fees charged to investors; fewer shareholders translate into a corresponding decline in fee-based revenues and less financial flexibility.

 

Earnings have languished at both large and small companies. Janus Capital Group (NSDQ: JNS), for example, experienced a 40 percent decline in managed assets last year, while Marsico Capital Management suffered an almost 50 percent drop, raising concerns about its ability to generate sufficient revenue and income to meet its obligations.

 

Although the spectacular collapse of Lehman Brothers and the Madoff scandal have engendered widespread misgivings about financial services as well as outright fear, mutual fund investors needn’t worry that fraud or their money management company’s financial problems will wipe out their investment.

 

Rest assured that the money you invest in a mutual fund is safe even if your fund manager goes bankrupt; mutual funds are subject to strict federal rules that prevent insolvent companies, or criminal activity, from bringing down the funds themselves.

 

If your money management company files for bankruptcy, its creditors can’t appropriate the mutual fund’s assets to recoup their losses because each fund is a discrete corporation or trust separate from its sponsor. Moreover, assets in a mutual fund must be held in a separate custodial account, another barrier that prevents the unscrupulous from absconding with your money.

 

Investors who hold mutual fund shares in a brokerage account insured by the Securities Investor Protection Corporation (SIPC) enjoy an added layer of protection against losses stemming from any malfeasance.

 

Each fund also has its own board of directors. If the firm overseeing the mutual fund were to fail, the directors could hire a new advisor to manage the assets.

 

That’s not to suggest that the pressures affecting the mutual fund industry don’t hold implications for individual investors. The mass redemptions that occurred last year forced fund managers to offload portfolio holdings at reduced prices, spelling higher expenses for remaining shareholders.

 

And any time the bottom line suffers management companies are likely to shutter and liquidate any underperforming offerings, which weigh on earnings as well as the fund family’s overall performance. According to Morningstar, 35 funds had ceased operation as of March 5, primarily newer offerings or those focused on niche sectors that failed to capture investors’ interest.

 

Because liquidation often occurs when a fund underperforms, investors usually suffer significant losses and may be liable for taxes on embedded capital gains that occurred before buying into the fund. (Gains on aren’t passed on to shareholders until the stock is sold).

 

Personnel layoffs are another cost-cutting measure that can adversely affect a fund’s performance. Asset management firms went on a hiring binge between 2005 and 2007, swelling payrolls with some 21,000 new jobs. But now the inevitable purge is now underway as the industry adjusts to the current environment. Although the majority of these layoffs have been concentrated among administrative and support staff, investors should be wary if right-sizing efforts extend to research and analysis departments.

 

The troubles afflicting the mutual fund industry have also manifested themselves in a spate of ownership changes, the implications of which vary depending on the situation.

 

Take, for instance, the management-led buyout of Neuberger Berman, the former asset management division of now-defunct Lehman Brothers. With most of the management and research teams remaining intact after the transition, shareholders in that family’s offerings are unlikely to experience any major disruptions.

 

On the other hand, investors in the Seligman family of funds would likely have a less sanguine view of J.W. Seligman’s recent acquisition by Ameriprise Financial (NYSE: AMP). Not only does Ameriprise plan to merge 47 Seligman funds into those of its RiverSource subsidiary, but Seligman shareholders are required to pay a one-time 0.16 percent fee to fund the cost of switching to RiverSource’s transfer agent—an expense usually borne by the acquirer.

 

Investors should evaluate the implications of any ownership change on a case by case basis, especially if the new regime imposes higher costs on fundholders or makes changes to the fund’s management or research teams.