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Schwab Settles YieldPlus Lawsuit

Plus, Fidelity hires former Treasury official, and more.

Morningstar Analysts, 04/26/2010

This week, Charles Schwab Corporation SCHW agreed to pay $200 million to settle a federal class-action lawsuit brought against the firm in 2008 following the implosion of its YieldPlus fund. Schwab settled the litigation without admitting liability. As a result of the settlement, the firm has to restate first-quarter earnings, which were announced last week. Net income, which was $119 million, will be reduced by about $105 million. Schwab noted that this agreement doesn't resolve plaintiff's state law claims or other pending regulatory matters.

YieldPlus was an ultrashort-bond fund, a type of investment that aims to provide a little more return with a little more risk than a money market fund. The extra risk was supposed to be minimal, but the fund under manager Kimon Daifotis owned bigger stakes in nonagency mortgage- and asset-backed bonds (including some backed by subprime loans) than its typical peer. The market hammered this fund from mid-2007 to 2008, when the market punished bonds with even a hint of risk. Shareholders began running for the door when the fund's performance started to suffer, compounding the problem by forcing it to sell its holdings at depressed prices to meet redemptions. The fund lost 3.6% in the second half of 2007 before plummeting 35% in 2008. Assets dropped from a June 2007 high of $13.5 billion to $6.5 billion by the start of 2008, and shrunk to $524 million by the end of July 2008.

Fidelity Hires Former Treasury Official
Fidelity announced this week that Karthik Ramanathan, who served as acting assistant secretary for financial markets for the U.S. Treasury department from 2008 until March 2010, has joined the firm as senior vice president and director of bonds, a newly created position. He'd been with the Treasury since 2005. Ramanathan will report directly to Christopher Sullivan, president of the bond group. From 2005 to 2008, Ramanathan ran the office of debt management for the Treasury, directing the issuance of Treasury securities. He'd spent 10 years at Goldman Sachs prior to his Treasury stint.

Putnam Drops Managers and Launches a Fund of Funds
Putnam has replaced the managers on three funds. Robert Brookby, who also runs Putnam Growth Opportunities POGAX, is taking over Putnam New Opportunities PNOPX from Gerry Moore and will also run Putnam Vista PVISX, replacing Raymond Haddad. Pam Gao will manage Putnam Small Cap Growth PNSAX, taking over for Anthony Sutton. Moore, Haddad, and Sutton have left the firm. These funds have seen their share of management turnover. All three former managers took over their funds in November 2008 after comanagers left, and all three have trailed their typical peers since taking over.PAGEBREAK

The firm also announced the launch of Putnam Global Sector, a fund of funds that will invest in Putnam's eight global sector funds, which are run by the same analysts who contribute ideas for Putnam Research PNRAX. The weightings will be in line with its benchmark, the MSCI World Index. Fees for the fund's A share class will be 1.43%, which is below the category median for front-load world-stock funds.

Two New Goldman Sachs Offerings
Last week, Goldman Sachs filed preliminary prospectuses for a high-yield floating-rate fund and a global-bond fund. The new High Yield Floating Rate fund, which will invest in floating and variable-rate loans from a variety of sectors. Roberta M. Goss, managing director and co-head of high yield and bank loans, and Rob Cignarella, vice president and co-head of high yield and bank loans, will run the fund. The second new fund, Goldman Sachs Strategic Income, will focus on U.S. and foreign investment grade and non-investment grade fixed income from various sectors. Jonathan Beinner, managing director and co-head of GSAM global fixed income and liquidity management, and Michael Swell, managing director and co-head global lead portfolio management, will manage the fund. The filings didn't disclose expense ratios.

Effective May 28, Perkins Small Cap Value JSCVX will be closed to new investors.

Forward Management announced that Tactical Growth FTGMX is now available in an A share class and their Banking and Finance fund now offers an Investor class. The firm also announced a new M share class for advisor-based platforms and retirement accounts. The new share class affects seven funds: Tactical Growth, Emerging Markets FEMMX, Global Infrastructure FGIMX, Select Income FSIMX, International Small Companies FNSMX, Small Cap Equity FSCMX, and Long/Short Credit Analysis FLSMX.

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