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A Manager Says the Market Rally Is Pure Junk

Plus, expense ratios go up for Alliance Bernstein, and more.

Morningstar Analysts, 06/22/2009

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

Turner's Quantitative Investing Team recently released a research piece on the bear market. Below are a few insights that we found interesting:

* The smallest and cheapest--and, according to its quantitative model, the most fundamentally unsound--stocks performed best since the market bottomed in March. In the Russell Microcap Growth Index, the stocks ranked in the lowest quartile for the factor of market capitalization--stocks with market capitalizations of less than $26.5 million--returned 93.49% from March 6 to May 8.

* In the wake of the bear market, small stocks priced at $1 or less accounted for about 25% of the small-cap benchmarks' weightings, compared with the historical average of 5%.

* Stock indexes plummeted more than 50% from their peak in October 2007 to March 2009, erasing 12 years of gains. The only time the stock market had fallen harder was between August 1929 and June 1932, when the S&P 500 Index lost more than 83% of its value.

* In November 2008, nearly one in 10 stocks traded below the value of their per-share holdings of cash--a greater proportion than even in 1932, when the market was at its lowest point in history.

Turner ended the piece with this strongly worded statement (nota bene, small-cap fund investors):

"In our analysis, this rally was an atypical, perverse phenomenon, a statistical fat tail, an investing anomaly. We doubt that any time soon we will encounter a stock-market rally that so lavishly rewards The Uninvestables--stocks with prices and market capitalizations that are so low that we and other institutional investors can't touch them."

Alliance Bernstein Funds' Expense Ratios Increase
Because of the deep market declines, some AllianceBernstein AB fund shareholders will pay a lot more than they have in the past.

This isn't because Bernstein is raising fees. It's just math, and it's been fairly common among mutual funds in the wake of the recent bear market, as Morningstar senior fund analyst Gregg Wolper recently wrote: "Funds have a certain amount of fixed costs, and when assets decline as sharply as they have in the bear market, the percentage of fund assets devoted to expenses--the expense ratio--can rise substantially even if the fund's advisory fee hasn't budged and the fund hasn't spent any more on printing or legal bills."

In one case, AllianceBernstein Growth AGRFX, shareholders might have to shell out about 20% more in fees than they did during the last 12-month reporting period. Below are some of the fees that investors can expect (according to the funds' most recent prospectus).

 AllianceBernstein Expense Ratio Increases

Annual Report
(Actual Fees Paid
During Previous Period)

(Anticipated Fees)
AllianceBernstein Growth AGRFX


AllianceBernstein Large Cap Growth APGAX


AllianceBernstein SMID Growth CHCLX


AllianceBernstein International Growth AWPAX


AllianceBernstein Global Thematic Growth ALTFX


AllianceBernstein Small Cap Growth QUASX


Fidelity's Asset Allocation Chief's Transition Complete
Derek Young has completed his transition to the role of chief investment officer of Fidelity's Global Asset Allocation Group, which he assumed in February 2009. This means that he will no longer be a named manager of Analyst Pick Fidelity Strategic Income FSICX, where he has worked since 2005, and other funds such as Fidelity Strategic Real Return FSRRX and Fidelity Strategic Dividend & Income FSDIX.

Christopher Sharpe will succeed Young and join Joanna Bewick as co-portfolio manager of the funds. Sharpe will continue to manage the Fidelity Freedom Funds and the Fidelity 529 college-savings plan for New Hampshire, Massachusetts, Delaware, Arizona, and California. Sharpe joined Fidelity in 2002 as an asset-allocation director in the Structured Investment Group and has been a portfolio manager at Fidelity since 2005.

PIMCO will launch a pair of exchange-traded funds to help investors counteract, or at least keep up with, inflation. PIMCO Real Income 2019 and PIMCO Real Income 2029 will invest at least 90% of their assets in inflation-indexed bonds. No date has been set yet for their official launch.

Shareholders are set to vote on the merger of Oppenheimer Baring Japan OBJAX (a tiny fund with less than $10 million in assets) into Oppenheimer International Growth OIGAX, one of our Analyst Picks in the foreign large-growth category.

Claymore Advisors announced the launch of three more actively managed ETFs. One of the ETFs that caught our eye is Claymore Laffer Macro Economic Global Equity ETF. Laffer Investments, the firm owned by economist Art Laffer, a Reagan Administration official, will manage the fund. The ETF will seek to identify undervalued equity markets around the world and invest only in the cheapest countries, using single-country ETFs.

Neuberger Berman equity CIO Alison Deans is leaving the firm at the end of the month to launch an independent advisory business. Neuberger president Joe Amato will add the role of equity CIO to his responsibilities after Deans departs.

In other executive news, AllianceBernstein L.P. announced that Gerald M. Lieberman will retire as president and chief operating officer at the end of July. David A. Steyn, global head of distribution for AllianceBernstein, will assume the role of chief operating officer.

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