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American Funds Win Means Loss for Shareholders

Plus, American Century gets a new CIO.

Morningstar Analysts, 02/22/2010

American Funds shareholders missed millions of dollars in potential fees savings because of a recent court decision.

On Dec. 28, 2009, Capital Research and Management Company, the investment advisor to the American Funds since 1931, became the latest advisor to prevail in an excessive fee lawsuit.

The decision is important because the investment community is just weeks away from the Supreme Court's decision in a similar excessive fee case: Jones v. Harris Associates. (Harris is the investment advisor to the Oakmark Funds.) Depending on that ruling, Capital Research may find itself in court yet again.

The recent decision in federal district court not only highlights how much money is at stake for fund shareholders and the mutual fund industry, but it also touches on the due diligence (or lack thereof) of mutual fund boards.

The case provided a rare look inside the largest privately held investment management company. Capital Research advises more than $880 billion in mutual fund assets as of Jan 1, 2010. The only other closely held advisor that comes close to Capital Research's size is Fidelity, which manages more than $700 billion.

The 105-page decision penned by U.S. District Court Judge Gary Feess sided with Capital Research but had some interesting observations about the family's mutual fund board and profit levels.

The profit levels at Capital Research would make most CFOs envious. In fiscal year 2008, combined net income for various Capital entities increased to more than $1.2 billion from roughly $361 million in fiscal 2003. Operating profit margins were consistently above 30% over the past few years. See Page 50 of the decision.

While Feess ultimately sided with Capital Research because the plaintiffs did not meet their burden of proof, he did not let the performance of the independent directors, who help set the level of mutual fund fees, slide.

Feess thought the board met all legal requirements but left a lot of questions unasked and didn't negotiate the best possible deal. And that's not surprising because the incentives to do so didn't seem to exist, according to the judge.

As evidence, Feess pointed to the fact that the directors regularly approved a 25 basis point 12b-1 fee, regardless of the assets under management.

In addition, Feess questioned the independence of the independent directors. In the judge's opinion, the trial testimony of the independent directors was aligned with Capital Research to such an extent that it persuaded him to give less weight to their testimony than he might otherwise.

American Century Gets a New CIO and Announces Manager Departure
John Schniedwind, CIO of the quantitative equity team for more than a decade, is retiring at the end of March after 27 years at American Century.

Scott Wittman, who joined American Century one year ago as CIO of the asset-allocation team, will also take on the quantitative CIO role at that time. Wittman previously ran quantitative strategies at Vantage Investment Advisors and Munder Capital, where he worked with current American Century CIO Enrique Chang.

In other news, Glenn Fogle, formerly of American Century Vista TWVAX, is leaving the firm in a few months. Fogle had been lead manager of that fund for many years but went on a leave of absence in September 2009. His former comanager, Brad Eixmann, who became sole manager when Fogle went on leave, will remain in place. Brian Unterholter, an analyst who arrived at the firm in 2008, has been promoted to comanager on Vista.

Meanwhile, David Holland, manager of several growth funds at American Century, has been named to replace Fogle as CIO of mid & small cap U.S. growth equity.

Fidelity Manager Passes Away; New Appointments Announced
Fidelity manager Victor Thay recently passed away. He was a manager of Fidelity Export & Multinational FEXPX and a comanager of Fidelity Advisor Global Capital Appreciation FGEAX. Thay's replacement on Fidelity Export & Multinational will be Heather Carrillo. Carrillo has been managing Fidelity Select Computers FDCPX since 2006. She joined Fidelity in 2000 as an equity research intern covering the satellite industry and became a full-time equity research analyst in 2001.

Thomas J. Allen will step in for Thay and comanager Sammy Simnegar on Fidelity Advisor Global Capital Appreciation. Allen will continue to manage Fidelity Advisor Mid Cap II FIIAX and VIP Mid Cap Portfolio VPFAX. Allen joined Fidelity in 1985 in the Fund Accounting group and returned to the firm in 1995 as an equity research analyst covering the insurance industry.

David Daglio of The Boston Company Asset Management, LLC has been named the new manager of Dreyfus Small Cap Value DSVAX. In related news, the fund's name will change from Dreyfus Small Cap Value to Dreyfus Small Cap. Daglio and his team also manage Dreyfus Midcap Value DMCVX. Dreyfus recently named Daglio the new manager on Dreyfus Emerging Leaders DRELX.

Invesco IVZ has decided to shed the AIM brand name. For example, AIM Charter CHTRX will eventually be renamed Invesco Charter. The firm took on the AIM name for some Invesco retail mutual funds in the wake of the 2003 market-timing scandal, in which the original Invesco fund family was deeply implicated.

Pending shareholder approval, Principal High Quality Intermediate-Term Bond PHINX will merge into the newly created Principal Bond Market Index PNIIX.

Pending shareholder approval, Wells Fargo Advantage Asset Allocation SFAAX will change its name to Wells Fargo Advantage Index Asset Allocation, while Evergreen Asset Allocation EAAFX will change its name to Wells Fargo Advantage Asset Allocation. The investment strategies and objectives of the two funds will remain the same.

Pending shareholder approval, Nicholas-Applegate International Growth NIACX will merge into Allianz NACM International Growth AIFAX.

Allianz NACM Global Equity 130/30 AGEPX will liquidate all assets by March 30, 2010.

Adelante US Real Estate Securities LLUKX will liquidate all assets by March 19, 2010.

Dreyfus announced multiple manager changes this week. Theodore Bair became the lead portfolio manager of Dreyfus Short-Intermediate Government DSIGX. David Leduc and Brendan Murphy joined the portfolio management team of Dreyfus International Bond DIBAX. Brendan Murphy also joined the portfolio management team of Dreyfus/Standish Global Fixed-Income SDFIX. Nancy Rogers became the lead portfolio manager of Dreyfus Bond Market Index DBMIX.

Jeff Middleswart replaced Charles Norton and Allen Gillespie as portfolio manager of Generation Wave Growth GWGFX and Vice VICEX.

(Fund Times was corrected to reflect changes to the fund names of two Wells Fargo and Evergreen funds, and not mergers of the funds as previously written.)

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