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Schwab YieldPlus Goes From Hero to Zero

Schwab also cuts fund fees; two prominent managers get set to launch a fund.

Ryan Leggio, Fund Analyst, 06/23/2011

Schwab plans to liquidate Schwab YieldPlus SWYSX as part of an ongoing effort to clean up its fixed-income lineup.

YieldPlus, once the largest fund in the ultrashort-bond category, will liquidate before the end of August. In mid-2007, the fund had more than $12 billion in assets and had been a top performer for several consecutive years. At the time, Schwab touted the fund as a higher-yielding alternative to cash.

Prior to 2007, YieldPlus delivered high returns because it was taking greater risks than was its typical peer. In late 2007, the nonagency-mortgage and asset-backed sectors began to suffer, and the fund's large stakes there caused its value to drop. In the following two years, heavy shareholder redemptions and declining market values eventually led to a 47% loss in April 2009 from the fund's July 2007 peak. Its assets have since dwindled to $141 million, and it has been the focus of several lawsuits alleging Schwab provided inadequate disclosure of the fund's risks.

Schwab has since spent hundreds of millions of dollars settling federal and state claims related to YieldPlus, along with charges filed by the Securities and Exchange Commission. Schwab will also liquidate Schwab Tax-Free YieldPlus SWYTX and Schwab California Tax-Free YieldPlus SWYCX, which also suffered from substantial investor outflows following performance blowups.

Since the YieldPlus debacle, Schwab has redoubled its efforts to tighten up and better abide by prospectus mandates. For example, Short-Term Bond Market SWBDX and Schwab Total Bond Market SWLBX were initially billed as bond index funds but held large stakes in nonindex securities such as nonagency mortgages. In 2008, Short-Term Bond Market trailed its benchmark, the Barclays Capital Government/Credit 1-5 Year Index, by 10.6 percentage points, and Total Bond Market lagged its benchmark, the Barclays Capital U.S. Aggregate Bond Index, by 9.7 percentage points. As of the Feb. 28, 2011 semiannual report, the managers had positioned the funds more in line with their respective benchmarks, and neither fund held any nonagency mortgages.

Meanwhile, Schwab Inflation Protected's SWRSX name will change to Schwab Treasury Inflation Protected Securities. The fund's mandate will be to invest at least 80% of assets in Treasury Inflation-Protected Securities. It previously could hold 80% of assets in a variety of inflation-protected fixed-income securities, including those issued by corporations and foreign governments.

The funds are becoming much cheaper for investors, as well. Schwab said it will cut the expense ratio for Schwab Treasury Inflation Protected Securities to 0.29% from 0.50%. Fees on Schwab Short-Term Bond Market and Schwab Total Bond Market will drop to 0.29% from 0.55%. While the fee cuts are a shareholder-friendly decision, it remains to be seen how well the fixed-income team can manage these funds going forward.

Romick and Gundlach to Team Up in New Alternative Fund
For the first time, two Morningstar Manager of the Decade nominees will team up to run a new fund. Steven Romick of FPA and Jeffrey Gundlach of Doubleline will join a team from Loomis Sayles and Water Island Capital to run the Litman Gregory Masters Alternative Strategies Fund.

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