One Fund's Watchdogs Have Lost Their Bite

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.

Morningstar's mutual fund Stewardship Grades aren't simply an accounting of how well a fund has treated shareholders in the past. They're designed to help you identify which funds are likely to be shareholder-friendly in the future.

The case of Atlas Global Growth AGRAX illustrates this point. In March, we gave the fund a C on our five-factor stewardship scoring system. While Atlas Advisers scored well on regulatory matters, we assigned the mutual fund board a "Poor" grade, due to conflicts of interest and the board's failure to align itself with shareholders. In May, we noted the irony of the fact that while Atlas scored poorly for stewardship, its parent company, Golden West Financial, was a paragon of corporate governance. Its founders, Herb and Marion Sandler, won Morningstar's CEOs of the Year Award in 2004, partly because they treated stockholders well.

Golden West Financial has since been acquired by Wachovia WB. And the news isn't good for the shareholders of Atlas Global Growth. The following is a cautionary tale of how mutual fund stewardship problems can end up harming fund investors.

Whither Goes Atlas Global Growth?
As a result of Wachovia's acquisition of Golden West, most Atlas funds are merging into Wachovia's Evergreen Investments unit. Several of Atlas' funds had been subadvised in the past, meaning that the Atlas board hired outside management teams to run the funds. This commendable arrangement, which involved the board conducting arms-length analyses of managers and ultimately sharing revenues with them, is coming to an end. Atlas shareholders are now being asked to approve several fund mergers. They will likely become owners of various Evergreen funds in May.

Unlike most of its siblings, Atlas Global Growth is not merging into an existing Evergreen fund. Instead, the fund is being "reorganized" into a new fund to be called Evergreen Intrinsic World Equity Fund. An Evergreen subsidiary called MetWest Capital (not to be confused with the bond-shop of the same name) will manage the portfolio.

This is problematic for a few reasons. First, it takes the portfolio out of the hands of Oppenheimer Funds, a superb subadvisor that had run the fund for Atlas since its 1996 inception. Bill Wilby and his successor, Rajeev Bhaman, managed the Atlas Global Growth portfolio essentially as a no-load, near-clone of Oppenheimer Global OPPAX. We think so highly of the Oppenheimer fund that we designated it a Fund Analyst Pick in the world-stock category.

What is worrisome is that the fund's investment approach seems set to change as a result of the merger. Whereas Oppenheimer Funds ran this as a growth fund, MetWest is a value manager. Value-oriented funds have beaten growth offerings since 2000. Is this really the best time to be taking assets out of the hands of a growth investor? That's especially true because manager Bhaman is a patient, value-sensitive growth manager who has gravitated toward out-of-favor developed-markets blue chips such as Microsoft MSFT, Vodafone VOD, and eBay EBAY. This move is reminiscent of all the value investors who gave up on their style in the late 1990s after so many years of growth dominance.