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AllianceBernstein Reboots Growth Funds

Plus, PIMCO's new fund, Morgan Stanley's mortgage-bond team shakeup, and more.

Morningstar Analysts, 08/18/2008

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.

AllianceBernstein has announced significant changes at its growth funds.

AllianceBernstein Growth AGRFX, AllianceBernstein Mid-Cap Growth CHCLX and AllianceBernstein Global Technology ALTFX will all get new management teams and strategies. The tech fund also will absorb AllianceBernstein Global Health Care AHLAX. All of the changes should go into effect by Nov. 3, 2008, according to a regulatory filing.

The nearly $1 billion in assets large-growth offering AllianceBernstein Growth will become an analyst-driven fund focused on domestic growth stocks. The firm's sector analysts will recommend picks for the portfolio that will be reviewed by a portfolio oversight group including Lisa Shalett, the firm's global head of growth equities; Vadim Zlotnikov, CIO of growth equities; Scott Wallace, a senior member of the firm's large-cap growth team that runs AllianceBernstein Large Cap Growth APGAX; and Frank Caruso, head of the firm's relative value team and manager of AllianceBernstein Growth & Income CABDX. Current lead manager Alan Levi will retire Dec. 31. Ultimately the fund will be more diversified. Under the new regime it will expand the portfolio from 45 to 70 holdings to 80 to 120. AllianceBernstein Growth also will switch its benchmark from the broader Russell 3000 Growth Index to the large-cap-focused Russell 1000 Growth Index, but the firm expects the fund to still invest in stocks of all sizes.

The $560 million AllianceBernstein Mid-Cap Growth will become a less aggressive small- and mid-cap growth fund and will change its name to AllianceBernstein Small/Mid Cap Growth. The firm's small/mid-cap growth team, which also runs AllianceBernstein Small Cap Growth QUASX, will eventually take over from the current team led by Catherine Wood, who remains on the fund for now. Although the small/mid-cap growth team has interacted with Wood and her squad in the past, their approaches are very different and the change will alter the portfolio significantly. Wood is a high-conviction investor who relies on top-down and bottom-up research and is not afraid of making huge sector bets. The small/mid-cap growth team, led by Bruce Aronow, is made up of bottom-up investors who rely on quant screens and fundamental analysis and stick pretty close to the sector allocations of their benchmark. So, the fund is bound to be more diversified and probably less volatile. Its new benchmark will be the Russell 2500 Growth Index. Besides Aronow, the small/mid-cap growth team includes N. Kumar Kirpalani, Samantha S. Lau, James Russo, and Wen-Tse Tseng.

Wood will still have a vehicle for her potent mix of macro and micro investing, though. The firm will give her the $1.3 billion in assets AllianceBernstein Global Technology and turn it into a wide-ranging fund called AllianceBernstein Global Thematic Growth. Instead of keeping at least 80% of the fund's net assets in tech companies, the fund will use Wood's combination of top-down thematic research and fundamental analysis to invest opportunistically across sectors and regions. The fund will invest in 60 to 80 companies and will use the MSCI All Country Index as its benchmark. It will focus on companies fostering and benefiting from technological change. Wood will be joined by former Mid Cap Growth team member Amy Raskin, as well as the firm's former Japan analyst Stephen Tong; director of global economic research on fixed income Joseph Carson; and Shalett; and Zlotnikov. The $100 million in AllianceBernstein Global Health Care also will merge with Global Thematic Growth, largely because the firm has decided that it is hard for investors to achieve good results with sector funds. Global Health Care's longtime manager, Norman Fidel, also is retiring.

The AllianceBernstein Global Research Growth ABZAX will change its name to be known as AllianceBernstein Global Growth but will not change its strategy as a global analyst-driven fund.

Last but not least, the firm will allow its global and international funds to go beyond traditional currency hedging. The funds will be able to make small active currency bets in the future. The managers will be able to take long and short positions in currencies and invest in currency-related derivatives, according to filings.

PIMCO to Launch Emerging-Markets Stock Fund
PIMCO has filed plans with the SEC to launch its first emerging-markets stock fund. PIMCO EM Fundamental IndexPLUS Total Return will track the Research Affiliates Fundamental Index (RAFI) Emerging Markets Index which, unlike traditional market-cap-weighted indexes, weights companies according to fundamental metrics such as sales, book values, cash flows, and dividends. The fund will get exposure to the Research Affiliates index by investing a portion of its assets in total return swaps. Bill Gross will run the remainder of the assets using an approach similar to PIMCO Total Return's PTTRX. The bond shop has yet to disclose the fund's launch date or its expense ratio.

Shakeup at Morgan Stanley Bond Fund
Following its recent mortgage-related stumble, Morgan Stanley Institutional Core Plus Fixed Income MPFIX is changing management. Comanager Roberto Sella, who had overseen the fund's mortgage research efforts, left Aug. 7, 2008. Two of the team's mortgage analysts have also departed. Comanager David Armstrong remain on the fund, and he'll be joined by Sanjay Verma, former co-head of the firm's rates trading team. Sheila Huang, who served as a portfolio manager at Highland Capital from January 2007 to August 2008 and a portfolio manager at Credit Suisse from April 2004 to January 2007, has joined the fund's mortgage effort. The team plans to hire one more senior credit analyst.

Merging, Liquidating
Pending shareholder approval, Dreyfus Emerging Leaders DRELX, which is run by Dreyfus affiliate Franklin Portfolio Associates, will merge into Dreyfus Small Company Value DSCVX, which is run by another Dreyfus affiliate, The Boston Company. Both funds land in the small-blend category, but their management teams use very different approaches. FPA manager Oliver Buckley, who also runs Vanguard Growth & Income VQNPX and Dreyfus Premier New Leaders DNLDX, relies on quantitative models that rank stocks on valuation, earnings momentum, and company-related signals such as insider trading. He keeps sector weightings close to the fund's benchmark, the Russell 2000 Index. On the other hand, TBC manager David Daglio, who runs Dreyfus Premier Midcap Value DMCVX as well, relies on fundamental research and isn't afraid to make bold sector bets against his benchmark, the Russell 2000 Value Index. The two funds share just 3.3% of the same holdings. Shareholders of Emerging Leaders will get lower costs, though. The combined fund will have an expense ratio of 1.18%, which is 0.15 hundredths of a percent less than what Emerging Leaders charges. If approved, the merger is expected to take place on or around Dec.17.

Janus Aspen INTECH Risk-Managed Growth, managed by Janus subsidiary INTECH, shut its doors forever Aug. 11. This $10 million quant fund adhered to a unique strategy that didn't work well. Unlike most of its peers, who rank stocks on valuation or momentum metrics, the fund's computer models screened for stocks in the Russell 1000 that were volatile and lowly correlated with one another. The fund delivered weak results over its short three-year life. It gained an annualized 2.2% in the three-year period ended July 31, 2008, lagging two thirds of its large-growth rivals. INTECH has yet to disclose when the fund will be liquidated.

ING International Value Opportunities had a short life as well. The $8 million fund, which was launched in March 2007, will liquidate on or around Sept. 27. It suffered from poor performance and had a high expense ratio.

Dan Culloton is a senior fund analyst for Morningstar.

Wenli Tan contributed to this article.

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