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Fund Times: Top High-Yield Manager Lands at Evergreen

Plus, Gross' take on rates, a Laudus Rosenberg hard close, more.

Morningstar Analysts, 04/30/2007

Esteemed manager Margie Patel, who earlier this month departed Pioneer High Yield TAHYX, has moved on to Evergreen Investments. She will take charge of Evergreen Strategic Income EKSAX and Evergreen Balanced EKBAX, along with a couple of variable annuity accounts.

The move, effective June 1, will replace sizable investment teams at each fund, which ran the funds using a separate sleeve approach, with Patel as sole manager. Also as of that date, both funds will see a broadening of their mandates. Patel will be given the flexibility to invest widely across asset classes, market capitalizations, and sectors, including her mainstay areas of experience: high-yield bonds, convertible securities, and equities. This investment flexibility should be well used in Patel's hands, as she's shown considerable talent in running not only her previous high-yield charge, but also an equity fund, Pioneer Equity Opportunity PEOFX.

While the move to Evergreen may have surprised some, the firm has been bolstering its talent on the fixed-income side recently, possibly in an effort to build out its income-generating infrastructure to take advantage of shifting demographic trends in the retirement population. For example, another important recent hire was Andrew Cestone, who previously headed Deutsche Investment Management's (advisor to DWS funds) high-yield group with considerable talent. He now heads Evergreen High-Yield Bond EKHAX team, where his abilities should be helpful in turning that struggling fund around.

PIMCO's Gross on Rates and Home Prices
Given the importance short-term interest rates have for the world of fixed-income mutual funds, equity funds, and economic activity more generally, we like to keep close tabs on what our most respected portfolio managers and market strategists think of the current rate environment and what's to come. In his most recent Investment Outlook, PIMCO bond manager Bill Gross, who heads up the team at the behemoth fund PIMCO Total Return PTTRX, mixes some optimism with pessimism in his analysis.

Gross argues that the fortunes of the current housing market (not good, in his mind) will have an important impact on the Fed and, therefore, on yields. "The Fed may be willing to allow U.S. homeowners to suffer a little pain as indeed they have in recent quarters, [but] a double-digit decline would risk consequences that few central banks would be willing to underwrite. So a forecast of home prices almost implicitly carries with it a forecast of interest rates," Gross writes. Gross thinks home prices are overvalued by 15% to 20%, and there has evolved a growing supply/demand imbalance in this market. For this imbalance to be corrected, therefore, either home prices must decline or mortgage rates must go down to stimulate demand. Because the political and economic fallout of a massive decline in housing prices would be unpalatable, he believes that "the Fed will cut rates and cut them significantly over the next few years.... [And] that speaks to an ongoing bond bull market of still undefined proportions."PAGEBREAK

Hard Close
Laudus Rosenberg International Small Cap
RISIX will be closed to virtually all investments, according to a recent filing made with the SEC. It will remain open to existing retirement-plan clients, but this hard close should help stem inflows into the fund. The offering had already closed to new investments at the end of 2005, when its asset base stood at nearly $1 billion. Currently, as it approaches the $2 billion mark, the hard close makes sense, because a large asset base can hamper small-cap managers who operate under greater liquidity constraints than their mid- and large-cap peers.

As One Door Closes, Another Opens
With close to 40% of foreign small/mid-value and foreign small/mid-growth category options closed to new investors, we're always interested in new opportunities in this area of the market. One such offering, the SPDR S&P International Small Cap ETF GWX, was just launched by State Street Global Advisors. The exchange-traded fund will invest in companies with market capitalizations of less than $2 billion in developed nations outside of the United States. The fund will track a S&P/Citigroup Global Equity Index, will be capitalization-weighted, and will carry an expense ratio of 0.6%, which is within the ballpark for similar funds. Also launched recently is the SPDR S&P World ex-US ETF GWL, which tracks a S&P/Citigroup Global Equity Index that includes more than 5,000 international stocks and carries a levy of 0.35%.

Natural Gas ETF Launched
A new ETF that tracks the price of natural gas was recently launched--United States Natural Gas UNG. Natural-gas prices are even more volatile than oil prices, and investors in this offering's sibling ETF, United States Oil USO, have seen their share of downside risk. To illustrate, USO plunged almost 12% in September 2006 and then another 8.5% the following month. Of course, the potential for double-digit gains is also there (although USO hasn't experienced one of those yet), but you need to have an ironclad stomach to endure the kind of volatility that can come with investments like these. In short, it's hard to make a strong case for this ETF.

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