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Fund Times: Key Managers Leave BlackRock, TCW

Plus, state muni funds get a reprieve, changes at Putnam, and more.

Morningstar Analysts, 06/02/2008

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.

TCW Value Opportunities TGVOX comanager Nick Galluccio will leave the fund and firm July 1 to become CEO of GAMCO Investors subsidiary Teton Advisors. This is a loss for TCW. Galluccio had been with the firm for 26 years and served as group managing director, U.S. equities, and also comanaged TCW Value Added TGSVX. He ran mid-cap blend Analyst Pick Value Opportunities with Susan Suvall for more than 10 years. Like his old job, his new one will include hands-on portfolio management. He will join Elizabeth Lilly as comanager of GAMCO Westwood SmallCap Equity WESCX, where they will try to revive the fund's reputation after a bad streak of underperformance earlier in the decade.

Veteran Manager Leaves Two BlackRock Funds
BlackRock Small Cap Growth Equity
PCGEX and BlackRock Small/Mid Growth SSEGX manager Neil Wagner has left BlackRock to pursue other opportunities, leaving comanagers Andrew Thut and Andrew Leger in charge. Small/Mid Growth also still has Rob Hallisey who became a comanager in January 2008. These funds lose a talented comanager. Small Cap Growth Equity performed well on Wagner's watch, which began in 2002. At Small/Mid Growth, Wagner had passed management responsibilities to his three colleagues over the past year and a half. These funds retain some attractive attributes, but the new leaders have to prove themselves before we become enthusiastic about the funds again.

Muni Funds Show Little Reaction to Supreme Court Ruling
The recent ruling in Davis vs. Kentucky, a case contesting the state's right to tax income on out-of-state municipal bonds, has had little impact on the returns of nationally diversified funds versus those focused on a single state. Early last week, the Supreme Court defended states' right to tax income on out-of-state munis. A couple in Kentucky had challenged that right. Since the ruling, the typical nationally oriented muni fund, whose managers diversify holdings across many states' issues, returned -0.26%. State-focused funds have posted similar returns, with a median return of -0.28%.

The status quo in the short term was probably a more desirable alternative to the chaos that might have enveloped muni markets had the court ruled otherwise. In recent months we spoke to many managers about the potential ramifications of an adverse ruling for the states. One of the most common refrains we heard was that such a ruling might spur an exodus out of state-focused funds, whose yields can become compressed by high demand--and into nationally diversified offerings. That scenario could have adversely impacted state fund NAVs, especially in big-issuance, high-demand states such as New York or California.

DWS to Merge Away Awful Small-Cap Fund
DWS Small Cap Value SAAUX is going by the wayside. DWS plans to merge it into DWS Dreman Mid Cap Value MIDVX. The small-cap fund, which was managed by a team from Deutsche Investment Management, posted average returns in the small-value category from its 2002 inception through early 2007. Since then, it has flown off the rails, losing more than 20% in the year ended May 28. The Dreman Value Management team--led by manager David Dreman--that subadvises DWS Dreman Mid Cap Value will inherit the fund's roughly $150 million in assets.

It's good to see these assets going into the hands of a proven value investor. Dreman took over DWS Dreman Small Cap Value KDSAX in 2002 and has chipped away at small-value rivals ever since, posting a five-year return that tops 90% of them. In fact, that fund's success led it to close to new investors, which explains why the mid-value fund is getting DWS Small Cap Value's assets instead.

Putnam Research Director Assumes New Roles
Executive and manager changes continue at Putnam Investments. The firm has named director of global credit research and co-CIO of large cap equity research Andrew Matteis its director of U.S. large cap equity research. He previously served as the interim director in the same role. The announcement wasn't surprising. Matteis joined Putnam Research's PNRAX management team in April, a role we have also seen research directors fill elsewhere, in order to best understand the investment theses of various analysts on their squads and evaluate those analysts' performance. Matteis will continue in his role as the credit research director as well.

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