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AXA Rosenberg Settles Coding-Error Case With SEC

Plus, Ariel launches a new fund, Fairholme's bond fund dives into equities, and more.

Morningstar Analysts, 02/07/2011

AXA Rosenberg has agreed to pay more than $240 million to settle charges that it concealed from clients a significant error in the computer code of the quantitative investment model that the firm uses to manage money, according to the SEC.

The SEC says the error caused $217 million in investor losses. It's the first time the firm or regulators have disclosed how much the error, first revealed nearly a year ago, cost investors.

AXA Rosenberg has agreed to settle the SEC's charges by paying $217 million to harmed clients plus a $25 million penalty. The firm, which manages approximately $31 billion in assets as of Dec. 31, 2010, settled without admitting or denying the SEC's findings. The firm was also required to hire an independent consultant with expertise in quantitative investment techniques who will review disclosures and enhance the role of compliance personnel.

The SEC's investigation found that senior management learned in June 2009 of a material error in the model's code that disabled one of the key components for managing risk. Instead of disclosing and fixing the error immediately, a senior official directed others to keep quiet about the error and declined to fix the error at that time.

The SEC found that the error, which was introduced into the model in April 2007, was eventually fixed for all portfolios. Knowledge of the error was kept from top AXA Rosenberg officials until November 2009 and from clients until April 2010.

The SEC's order found that the firm made material misrepresentations and omissions about the error to its clients. According to the SEC, the firm failed to disclose the error and its impact on client performance, attributed the model's underperformance to market volatility rather than the error, and misrepresented the model's ability to control risks.

The error cost AXA Rosenberg a lot of assets and business. Institutional investors and mutual fund families for which the firm had managed money, including Schwab and Vanguard, fired it in the wake of the controversy.

Ariel Launches First New Fund in Five Years
Ariel Investments, LLC, launched Ariel Discovery ARDFX this week. It is the firm's fourth fund and its first since it launched Ariel Focus ARFFX almost five years ago.

The fund will invest in 30-40 companies with market capitalizations under $2 billion at the time of initial purchase. This will make it Ariel's only fund in a Morningstar small-cap category.

David M. Maley will serve as lead manager on the fund while Kenneth E. Kuhrt will act as a comanager.

Maley, who joined Ariel in April 2009 from Maple Hill Capital Management, currently leads Ariel's micro-cap value strategy. Kuhrt is a comanager on Ariel institutional funds where he works closely with managers John W. Rogers Jr. and John Miller. In addition to portfolio-management duties, Kuhrt serves as an industry specialist covering consumer services and industrial companies. Kuhrt joined Ariel as a research analyst in 2004.

The fund has a $1,000 investment minimum and a 1.50% net expense ratio. Ariel has agreed to limit the fund's expenses to 1.50% through Sept. 30, 2014.

Fairholme Focused Income Dives Into Equities
The latest portfolio of Bruce Berkowitz's Fairholme Focused Income FOCIX indicates the successful value investor is finding a lot of income opportunities in the equity market. The $400 million multisector-bond fund disclosed a 21.5% stake in domestic-equity securities as of Nov. 30, up from nothing six months earlier.

Holdings in telecom companies AT&T T and Verizon Communications VZ make up 9.5% of assets. Both stocks have more than 5% dividend yields, which is higher than the companies' respective 10-year bonds.

Other new equity holdings include General Growth Properties GGP, which paid its first dividend since emerging from bankruptcy last month, as well as Royal Dutch Shell RDS.A and Spanish bank Banco Santander STD.

The fund has about 25% of assets in cash and cash equivalents, down from the 66% it had in May. Its exposure to domestic corporate bonds has risen to 46.6% from 24.3%.

The $20 billion Fairholme fund also disclosed some new holdings. The fund initiated positions in Banco Santander, General Electric GE, and Chinese life insurer AIA. The fund shed its positions in Comcast CMCSA and Humana HUM, among others.

Both funds had a strong 2010. Fairholme appreciated 25.5% compared with the 15% gain for the S&P 500. Fairholme Focused Income was up 11.2% while the Barclays Aggregate Bond Index gained 6.4%.

Fairholme's most recent annual report is here.PAGEBREAK

Wasatch Lowers Fees on Three Funds
Wasatch Advisors agreed to lower the management fee on three of its funds.

Wasatch International Growth's WAIGX fee dropped to 1.25% from 1.50%, bringing the total expense ratio to 1.61%. Wasatch Global Opportunities' WAGOX fee dropped to 1.50% from 1.95%, bringing the expense ratio to 1.88%. And Wasatch Ultra Growth's WAMCX fee fell to 1.00% from 1.25%, bringing the expense ratio to 1.46%.

Despite the cuts, the funds' expense ratios remain higher than the median funds in their respective Morningstar categories.

Wasatch also said that starting April 1 Wasatch Global Science & Technology WAGTX will be able to invest outside the tech sector, though Wasatch still expects the fund to have significant exposure in science and technology companies going forward.

The firm has decided to shed the 1st Source name on two of the funds it acquired in 2008. Wasatch-1st Source Long/Short will become Wasatch Long/Short FMLSX and Wasatch-1st Source Income Equity will be renamed Wasatch Large Cap Value FMIEX. There will be no changes to the management or investment strategy at either fund.

Janus To Launch Fund To Limit Losses
Janus plans to offer a fund that uses insurance to limit its downside, according to a regulatory filing. Janus Protected Growth will hire an insurance company to back a promise that the fund's net asset value won't fall below 80% of its highest point, according to a preliminary prospectus filed with the Securities and Exchange Commission.

The fund would liquidate if the fund's end-of-day NAV fell that far and triggered the guarantee, the filing said. The fund would not liquidate if its intraday NAV fell 80% below its previous high.

Jonathan Coleman, the firm's co-chief investment officer, and Daniel Riff will manage the new equity fund that will have a $2,500 minimum investment. The fund's expected expense ratio was not disclosed, but Janus' management fee is tentatively set at 0.64% per year.

For a copy of the preliminary prospectus, click here.

Selected Goes International
Selected Special Shares SLSDX is going international. The mostly domestic, all-cap equity fund that's team-managed by the analysts of Davis Selected Advisors will switch by May to a foreign fund at the behest of the Selected Funds' board of directors, according to a recent regulatory filing. It will change its name to Selected International Fund. Most of the managers of the fund will remain the same, and so will the bottom-up, value-oriented investment process and management fee. The $92-million-in-assets fund's holdings and weightings will change significantly, though. Because of the changes, the fund will no longer be a Morningstar Analyst Pick in the large-growth category.

Etc.
John Roth, manager of Fidelity New Millennium FMILX, is taking over Fidelity Mid-Cap Stock FMCSX from Shep Perkins. Putnam announced that Perkins is joining the firm as co-head of international equities.

Lynette Berger resigned as vice president and CIO of Nationwide Mutual Funds on Jan. 21, 2011.

American Century filed to launch American Century Global Real Estate on April 29, 2011.

Manning & Napier filed to launch Manning & Napier Financial Services EXFSX and Manning & Napier Real Estate MNREX on May 1, 2011.

Pioneer filed to launch Pioneer Absolute Return Credit on April 18, 2011.

Virtus AlphaSector Allocation PSWAX will be merged into Virtus AlphaSector Rotation PWBAX March 25, 2011.

On Feb. 1, 2011, Mariner 130/30 MARNX changed its name to Convergence Core Plus.

Touchstone Emerging Markets Equity TEMAX will close to most new investors Feb. 28, 2011.

Quant Long/Short QGIAX is now called Quant Quality. The fund is now managed by Robert Pentz and subadvised by Columbia Partners.

Old Westbury Global Small & Mid Cap OWSMX added Mondrian Investment Partners as a subadvisor.

As of Jan. 31, 2011, Keith Hembre and Walter French will manage Nuveen HydePark Group's portion of Nuveen Multi-Manager Large-Cap Value NNGAX.

On Jan. 31, 2011, Lord Abbett Developing Local Markets LDMAX changed its name to Lord Abbett Emerging Markets Currency.

On March 31, 2011, Lord Abbett Developing Growth LAGWX will close to most new investors.

Invesco Prime Income XPITX will merge into Invesco Van Kampen Senior Loan VSLAX in April 2011.

Patrick Shum was replaced by Alina Chiew as a portfolio manager on Goldman Sachs Asia Equity GSAGX. The fund is now managed by Chiew and Rick Loo.

Patrick Shum and Richard Flax are no longer on the management team of Goldman Sachs Emerging Markets Equity GEMAX. The fund is now managed by Alina Chiew and Gabriella Antici.

Jeffrey Moore replaced Gregory Pappas as portfolio manager of Strategic Advisers Core Income FPCIX.

William Chepolis, John Ryan, and Darwei Kung joined the portfolio-management team of DWS Emerging Markets Fixed Income SZEAX and DWS Global Bond SZGAX.

Gregory Liechty joined the portfolio-management team of Columbia Balanced CBLAX.

On Feb. 1, 2011, BB&T Equity Index was renamed Sterling Capital Equity BAEQX.

AllianceBernstein Diversified Yield AGSAX will change its name to AllianceBernstein Unconstrained Bond on Feb. 3, 2011. The fund's management team will be replaced by Joel McKoan and Michael Mon.

Rosanne Ott is no longer a portfolio manager on Alger Health Sciences AHSAX.

Scout Funds filed to launch Scout Core Plus Bond on April 13, 2011.

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