|
|
Chances are your mutual fund manager doesn't eat his own cooking.
A new report from Morningstar Inc. looks at fund managers’ personal holdings of the funds they run, and concludes: "The number of managers showing no faith in their process is staggering."
In other words, relatively few managers invest alongside their shareholders. Too often, a fund may be good enough for you, but not for a penny of your manager’s own money.
Morningstar compiled the data over the last year or so from reports the Securities and Exchange Commission mandated beginning in 2004.
The SEC requires only that fund managers disclose the range of their personal holdings in their funds, and the ranges are pretty broad -- for example, $10,001 to $50,000, $50,001 to $100,000, $100,001 to $500,000, etc.
Still, it’s enough to give fund shareholders a sense of how much their manager has at stake in the fund -- or, too often as it turns out, to show that the manager has nothing at stake.
"When looking at the data, the figures that jump off the page are those where no one invested a dime," says Russ Kinnel, Morningstar’s director of fund research in Chicago.
Among the nearly 6,000 stock and bond funds that Morningstar analyzed, 47% of the U.S. stock portfolios reported no manager ownership, Kinnel says.
That’s pathetic enough, but "it gets worse from there," he says. "Fully 61% of foreign-stock funds have no ownership, 66% of taxable bond funds have no ownership, 71% of balanced funds put up goose eggs, and 80% of muni funds lack ownership."
Some fund industry executives have contended that it may not make sense for a manager to own shares of a fund he oversees, depending on the manager’s own financial goals.
Kinnel, in his report, says that’s baloney.
"There are really only two excuses for not owning a fund you run. First, if you run a single-state municipal-bond fund for a state other than the one you live in, it doesn't make sense to own that fund as you won't benefit from the tax breaks. Second, managers who are citizens of foreign countries have a good excuse if their country bars investment in U.S.-domiciled funds.
"For managers who run niche funds or run a lot of funds, there's good reason for them to be at the lower end of the [ownership] ranges, but not at zero," he says. "With the two exceptions I spelled out, I can't think of why anyone should invest in a fund that its own manager doesn't invest in.
"True, higher investment levels aren't a guarantee of success or an ethical manager, but at least they show that managers believe in the funds and they pay some of the costs and taxes that the rest of shareholders do."
Damn right, Russ.
Once again, the L.A.-based American Funds mutual fund group is refusing to settle federal regulators’ three-year-old case against the company involving revenue-sharing deals with brokerages.
The giant firm now has appealed the case to the Securities and Exchange Commission, a company spokesman confirmed today.
The Financial Industry Regulatory Authority (FINRA), the securities industry's self-policing agency (and successor to the old NASD), in 2005 accused American Funds of making nearly $100 million in improper payments to about 50 brokerages from 2001-2003 as an incentive to get them to pitch its funds to investors.
Dozens of other fund companies have faced similar "pay-to-play" cases in recent years, and nearly all of them have done what financial firms normally do when their watchdogs allege wrongdoing: quickly settle by paying a fine, without conceding the charges.
But privately held American Funds, the biggest U.S. stock and bond fund manager (assets: $1.1 trillion), has refused to cave. After two separate FINRA panels rejected the firm’s appeal -- the latest rejection came April 30 -- the company had one venue left: the SEC. So on they go, to Washington. This fight could keep lawyers on both sides busy into 2009.
I explained in this column why American Funds just won’t let this matter pass, even though the rest of the fund industry has moved on.
A few items of note from around the markets:
--Worse even than March, and March was bad: The list of financial-company stocks falling to new multiyear lows is getting longer. On Wednesday it included insurer American International Group, Bank of America Corp., Wachovia Corp., Downey Financial Corp., KeyCorp. and bond insurer MBIA Inc. As this earlier post notes, the BKX index of 24 major bank stocks now is a hair’s width away from a new low.
As I noted last week, many investors have been hoping that the stock market’s March lows marked the worst of the selling brought on by the housing crash and its fallout. Broad market indexes still are above their March nadirs. But if investors’ faith is ebbing again in the health of big financial companies, it implies that the Federal Reserve hasn’t done enough, after all, to rescue the financial system from its own excesses.
--As if the Fed doesn’t have enough troubles: Bernanke & Co. want the markets to believe that the jump in inflation caused by higher energy and food prices will be damped sooner than later. Doesn’t sound that way from Dow Chemical Co.’s announcement Wednesday that it will raise prices up to 20% because of "rising energy, feedstock and transportation costs." And when you sell $54 billion a year in chemicals, plastics and other products, your double-digit price increases are going to be felt in a lot of places on this planet.
--Sticking with bonds over stocks: The stock market rallied briskly in April, but U.S. investors’ favorite mutual fund last month was a bond fund -- the Newport Beach-based Pimco Total Return fund, which sports a 2.7% gain year to date. The fund took in a net $2.5 billion in fresh cash (new sales minus redemptions) in April, according to Financial Research Corp. The Pimco fund, with $128 billion in assets now, also took in the most cash of any fund in the first four months of the year ($11.6 billion). In other words, many investors continue to stress relative safety of principal over the chance to catch an upward turn in stocks. By contrast, the five most popular funds in the first four months of 2007 all were big-name stock funds, while Pimco Total Return ranked 16th in that period.
--Goodbye IHOP, hello . . . say what? Glendale-based IHOP Corp. is changing its name to DineEquity Inc. effective Monday, the company announced Wednesday. IHOP, parent of International House of Pancakes, last year bought the Applebee's chain. So IHOP alone no longer cuts it for a corporate moniker, CEO Julia Stewart said. "Our name change to DineEquity reflects the promise of our newly combined company," she said. Well, it does at least roll off the tongue a little easier than IHOP. The company's stock ticker symbol also will change, to DIN.
From Times staff writer Walter Hamilton:
It may get a little easier for mutual-fund buyers to sift through the thousands of offerings out there.
The Securities and Exchange Commission is proposing that fund companies electronically "tag" key information such as investment objectives, risks and fees in their fund prospectuses and annual reports. The goal is to help investors zero-in on key information and easily analyze funds side-by-side using standardized data.
A quick spin through a test page on the SEC's website shows the service is helpful as far as it goes -- but there’s a lot it doesn't do.
Investors can view basic features of up to three funds at a time. It's easy, for example, to compare the fees of the Vanguard S&P 500 fund versus the Federated Capital Appreciation fund. (Only a limited number of funds are available in the test phase.)
But the site only goes so far. It lists annual returns for each fund, but doesn't calculate average annual returns over time or offer comparisons to broad market indexes or general fund categories in the way that, say, Morningstar does.
More than that, the site isn't a true mutual-fund screener and can’t be used to select funds based on broad criteria such as investment objective or asset size.
The site still is in the works and there is a lot of time for investors to offer the SEC their suggestions: The agency isn’t proposing to require companies to tag reports until Dec. 31, 2009.
California taxpayers may be among the big winners in the U.S. Supreme Court’s decision on Monday not to upset the apple cart in the world of municipal-bond finance.
But some individual investors might well have liked to have had the cart overturned. It might have provided them with more diversification options for their muni portfolios.
The high court issued its much-awaited ruling in a Kentucky case that challenged the rights of states to exempt their own muni bonds from state income tax while taxing the interest generated by other states’ bonds.
The court voted 7 to 2 that the long-standing practice by the states doesn't violate the Constitution, so the decision maintains the status quo in the muni market. (For more on the ruling, and some background on the case, go here.)
 The upshot is that California and other high-tax states get to preserve their captive investor audiences: If you’re given a double tax exemption (federal and state) on a California muni bond, why would you buy a bond of another state that would be subject to California’s steep income tax?
The captive-audience factor helps California and its counties, cities and other local issuers finance government operations. Without that tax favoritism -- that is, if California issuers had to compete for individual investors’ attention with muni issuers across the nation -- California bonds might have to pay higher yields (same for the debt of New York, Massachusetts and other high-tax states).
That’s a headache California Treasurer Bill Lockyer didn’t need. Given the state’s low credit rating and deteriorating fiscal situation, "Taxpayers could ill afford to see any additional money go out the door" to pay bond interest costs, said Tom Dresslar, a spokesman for Lockyer.
The mutual fund industry also breathed a sigh of relief after the court’s decision. All those single-state muni bond funds would have lost their reason for being if the justices had decided otherwise. "This removes a cloud of uncertainty" over the single-state fund business, said John Miller, who heads the muni investing team at Nuveen Investments in Chicago.
Yes, but what of muni investors? True, an adverse decision could have disrupted the market just as yields have settled back after spiking in winter in a sell-off fueled by Wall Street’s credit crunch. Many muni investors like the market the way it usually is: uneventful.
Still, diversifying a muni portfolio could be to a California investor's advantage in the long run. One obvious danger faced by owners of the state's bonds is that a major earthquake could financially devastate the state or some municipalities, threatening their ability to pay their debts.
You can, of course, diversify on your own, and some people do. But that double-tax-exemption for in-state debt, now blessed by the Supreme Court, is a powerful incentive to remain a captive investor in California.
The giant American Funds mutual fund firm in recent months managed to get two regulators to back off from allegations of questionable sales practices. But the company was tackled today by a third securities-industry cop.
An appeals panel of the Financial Industry Regulatory Authority, the self-policing agency of the securities business, upheld the group’s three-year-old case alleging that the sales arm of L.A.-based American Funds broke industry rules in rewarding brokerages that sold its funds to investors.
The upshot: About 50 major brokerages got nearly $100 million in improper financial incentives, beyond normal sales fees, to hawk American Funds to clients from 2001 to 2003, according to FINRA. (Read the summary of the decision here.)
The money was awarded through a now-banned industry practice known as directed brokerage. As American Funds bought and sold stocks for its portfolios, it had to decide which brokerages should get the commission-generating trades. Many of those trades, FINRA says, were sent to brokerages that had met pre-arranged sales targets for American Funds -- which amounted to a deal rife with potential conflicts of interest, the agency says.
The group’s appeals panel, known as the National Adjudicatory Council, added a dig at American Funds in the decision it handed down today. The council rejected the 2006 conclusion of a lower hearing panel, which decided that although American Funds’ sales arm broke industry rules governing sales arrangements with brokerages, the firm had been "negligent, not intentional or reckless." Wrong, the council says: In upholding a $5 million fine against the company, it judged the firm’s conduct to be "intentional."
The fine is a pittance for American Funds’ parent, Capital Group Cos. The private firm is the largest U.S. manager of stock and bond mutual funds, with $1.07 trillion in fund assets. Moreover, FINRA didn’t allege that American Funds’ investors were harmed by its practices.
This fight was always about reputation and image. The case marked the first time in Capital Group's 77-year history that it had been censured and financially penalized by a regulator. The firm's blemish-free record has long been a source of great pride to its executives.
Until today, American Funds looked like it was on a roll in terms of escaping censure: Since October, the Securities and Exchange Commission and California regulators have abandoned their own probes into the firm's sales practices and deals with brokerages.
Dozens of other fund companies in recent years were accused by regulators of having similar improper "revenue-sharing" practices with brokerages that sold their funds. Nearly all of the firms settled, often paying large fines, without admitting or denying wrongdoing.
Capital Group has refused to settle, insisting it did nothing wrong. It rejected FINRA's initial allegations in February 2005 and demanded a hearing. When the first hearing panel ruled for the agency in August 2006, Capital Group appealed to the group's national council.
The company’s next appeal, if it so chooses, would be to ask the SEC to review the FINRA council’s decision. A spokesman said the firm couldn’t yet say if it would appeal.
Posted April 30, 2008
Bill Miller, manager of the Legg Mason Value Trust mutual fund, has published his first-quarter shareholder letter, in which he explains and defends his abysmal performance.
 As many investors know, Miller had a legendary record with the fund, beating the S&P 500 index for 15 straight years through 2005. Things fell apart after that: In 2006 Miller trailed the S&P by about 10 percentage points. In 2007 he lost 6.7% while the S&P rose 5.5%. And in the first quarter of this year the bottom fell out: Miller's fund crumbled almost 20%, double the S&P's loss.
He is, once again, optimistic about the prospects for his portfolio, which includes many tech, financial and housing stocks. And once again he takes a swipe at the commodities markets, a sector he has long reviled.
He writes: "Although the economy is likely to struggle as it did in the early 1990s, the market can move higher, as it did back then. The wild card is commodities. If commodities break, or even just stop their relentless rise, equity markets should do well. If they continue to move steadily higher, they have the potential to destabilize the global economy."
Read the entire letter here.
Photo: Bill Miller/Legg Mason
Posted April 24, 2008
A few items of note from around the markets:
-- Kudos to Oppenheimer & Co. analyst Meredith Whitney, who was clear as glass in her warning on March 28 that Wachovia Corp. would slash its dividend this month amid worsening loan losses. Investors who weren’t paying attention -- or who still believed the dividend was safe -- shelled out as much as $29.97 a share for Wachovia the first week of April. The closing price Monday, after Wachovia hacked its payout 41%: $25.55, down $2.26.
-- Wachovia’s dividend cut probably produced more pain for shareholders of the Dodge & Cox Stock mutual fund in San Francisco, which counted Wachovia as its fourth-largest holding as of Dec. 31, at 3.3% of assets. Data for March 31 aren’t available yet, but Dodge & Cox tends to be a long-term investor.
The $55-billion fund, a star performer for much of this decade, hit a wall in 2007. It eked out a mere 0.1% gain for the year as large holdings including Comcast Corp., Time Warner Inc., Pfizer Inc. -- and Wachovia -- slumped. The value-oriented fund is off to another poor start this year, down 11.9% (including a 0.8% drop on Monday), compared with a 9% drop for the Standard & Poor’s 500 index.
-- Baywatch it isn’t: With annual-meeting season approaching the AFL-CIO has launched the 2008 version of its "executive paywatch" website, which as you might guess is not aimed at congratulating CEOs on their well-earned compensation last year. Anyone who enjoys looking at numbers with lots of digits to the left of the decimal point will find a gold mine here.
The Schwab Yield Plus bond mutual fund is a classic example of what can happen when investors flee a struggling fund in droves. Things can quickly go from bad to worse for those who stay put if the fund manager is forced to sell depressed securities to meet redemptions.
The portfolio, marketed as an "ultra-short-term" bond fund -- in theory, just a step up in risk from a money-market fund -- had some of its assets invested in sub-prime-mortgage-related securities last year. That led to losses in the third and fourth quarter, and triggered a rush of redemptions.
Fund-tracker Morningstar details the latest on the situation here. The Schwab fund's share price has sunk from $8.79 at the end of February to $7.34 today, a 16.5% plunge. It's a good bet that no investor in this fund ever contemplated losing that amount of principal.
|
Tom Petruno
Tom Petruno has been chronicling financial markets' highs and lows since 1979, and has been the Times' financial columnist since 1990. He writes on markets, corporate finance and the economy, and how it all ties in to individual investors' portfolios.
|
Subscribe to this Blog
Chuc Shumer's letter is like an arsonist...
What irritates me is that this year CALP...
pugtv, ACC Capital (acquired by Citi las...
People should remember that CALSTERS mem...
Hey Tom, This would be a good time for y...
With all of the special dealing where a ...