Is Mutual Fund Crisis Lurking?

Mutual fund investors need to prepare today for tomorrow’s potential crisis.

So says Donald Christensen, author of a controversial assessment of the popular investment vehicles, “Surviving The Coming Mutual Fund Crisis.”

First, Christensen says, do as much direct investing as possible before turning to mutual funds. Buy your own Treasury bonds from the Federal Reserve through the popular Treasury Direct program. Invest in bank certificates of deposit. Buy individual shares of stock - but only in companies you’ve researched and whose business you understand.

Then, turn to funds to round out your portfolio in areas such as international investing, where the direct approach is more difficult.

As for which funds to buy, Christensen advises steering clear of those that are new, invest in junk bonds, or fall into the bottom 10 percent of long-term performance records.

He wants investors to ignore funds at the top of shortterm track records since their managers probably assumed additional risks to get their outsize returns.

With one eye firmly on the past, Christensen says investors must understand the risks involved in mutualfund investing. Individuals were burned during earlier fund booms in the 1920s and 1960s - and history could repeat itself.

“If you’re not willing to learn the legacy of mutual funds,” he said, “then get out of funds or expect to become a victim.”

The auditors are coming

Here is one type of lottery where the winners are those not chosen. Starting late next year, the IRS will take an especially close look at about 153,000 returns for 1994 selected at random from various income groups and types of returns. These dreaded line-by-line audits, the first since the late 1980s, make up what is known as the “taxpayer compliance measurement program.” Survivors call them audits from hell.

An audit can cost a taxpayer many thousands of dollars in accounting or legal fees, even if the person winds up owing little or no additional taxes. “These audits are really an ordeal,” says Bruce Haims of the law firm Debevoise & Plimpton in New York. IRS officials say they need the program to improve taxpayer compliance, gauge how much cheating goes on and figure out how to deter it. They plan to examine individual, corporate, S corporation and partnership returns. Some tax specialists say the audits are so time-consuming that the IRS should reimburse targets for reasonable expenses.

Forget that idea, the IRS replies.

The big bear

One of the baddest bears these days is Doug Kass of JW Charles/CSG in Boca Raton, Fla. So when Kass has something nice to say about a group of stocks, listen.

What Kass likes is industrial cyclicals - companies in steel, timber, paper, heavy construction and so on. These businesses’ fates are tied to the economy. They’ve been out of favor lately; factory-equipment stocks, for instance, are down 17 percent this year.

What Kass doesn’t like is consumer stocks. He has prepared a graph that shows that companies such as Philip Morris Cos., Coca-Cola Co. and Gillette Co. are overvalued relative to the cyclicals. He makes a good case.

Kiddie tax

The ‘kiddie tax’ on investment income of children under 14 will apply to amounts above $1,300 in 1995, up from $1,200. Typically, the first $650 of such earnings will be tax-free and the next $650 will be taxed at the child’s rate, usually 15 percent. Higher sums are taxed at the parents’ top rate.