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Fund Times: SEC Investigates Wall Street Front-Running

Plus, new BlackRock funds, manager changes, and more.

Morningstar Analysts, 02/12/2007

The New York Times reported that the SEC is investigating several Wall Street banks for potentially divulging inside information to clients in advance of large institutional trades. The recipients of such information could use it to front-run the trades, whereby they take a position that will benefit once the brokerage executes the trade for the institution (commonly, mutual fund companies). The investigation is still in its fact-finding stages, according to an SEC officer quoted in the report, and the firm has already requested information from several large banks including UBS UBS, Deutsche Bank DB, Merrill Lynch & Co. MER, and Morgan Stanley MS.

Veteran Financial-Sector Investor to Retire
John Hancock Funds' Jim Schmidt will retire this spring after more than 25 years in the business. Schmidt is the lead manager on several John Hancock funds, and his 21-year tenure at JHancock Regional Bank FRBAX is the longest of any financial fund manager. It's no surprise that this fund is the largest in its category, either. Since the 1992 inception of its A shares, Schmidt delivered a load-adjusted annualized return of 15.7%. He made sure the fund benefited from a wave of industry consolidation that began in the mid-1990s and that he and his team believe is not done yet.

Metropolitan West Closes Fund
Metropolitan West Strategic Income
MWSTX will close soon. The firm announced plans for a soft-close of this short-term bond fund at the end of March. The close bodes well for current shareholders. Met West's team needs to keep this fund nimble--it currently has less than $300 million in assets--in order to execute its unusual strategy. The team invests a significant percentage of assets in high-yield bonds in an effort to squeeze extra return out of the market, although it hedges those holdings with complex financial instruments to reduce credit risk.

BlackRock Readies Launch of Target-Date Funds
BlackRock will soon introduce nine Lifecycle Prepared Portfolios to meet various target retirement dates. The new lineup will start with a 2010 fund, with another fund for each succeeding five years through 2050. The 2040, 2045, and 2050 funds will all invest 100% of assets in underlying BlackRock equity funds at their launch, while the funds with closer target dates will have a mixture of both equity and fixed-income exposure. BlackRock did not announce the expense ratios for any of the funds.

Managers are in place for the new funds. Philip Green, a BlackRock managing director, and Linda Zhang, a director at the firm, will lead the way. Zhang joined BlackRock in its merger with State Street Research & Management, while Green recently joined the firm from Merrill Lynch Investment Managers.

TIAA-CREF Adds Manager to International Fund
TIAA-CREF International Equity
TIINX is getting a new comanager. Shigemi Hatta joins the team as its lead stock-picker for Asia-based companies. She replaces former comanager Yumiko Miura, who is no longer with the team. Christopher Semenuk will remain with the team and become lead portfolio manager.PAGEBREAK

Fidelity Names New Managers to Several Funds
Fidelity Investments added Ramin Arani as a new comanager of Fidelity Puritan FPURX, a solid, if unspectacular, hybrid fund managed by Stephen Peterson since 2000. Comanagement of funds is still quite unusual for Fidelity.

Jeffrey S. Feingold succeeds Arani at Fidelity Trend FTRNX. Feingold also manages the U.S. sleeves of Fidelity Worldwide FWWFX and Fidelity Global Balanced FGBLX and has had several sector-fund assignments. Also, Jason Weiner succeeds Adam Hetnarski as manager of Fidelity Growth Discovery FDSVX (formerly Fidelity Discovery). The change was not unexpected--Fidelity had indicated that the fund would get a more growth-oriented manager to match the fund's modified mandate. Weiner recently became manager of Fidelity Advisor Equity Growth FAEGX and has run a number of diversified funds over the past 10 years. Most recently, he managed Fidelity Independence FDFFX, where he handily beat the large-growth category average from April 2003 through November 2006.

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