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A Stewardship To-Do List for Two Fund Shops

JP Morgan and Pioneer have work to do.

Karen Dolan, 12/04/2006

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. Fund Analyst Picks are available on Premium Morningstar.com.

The Securities and Exchange Commission has been busy this fall, looking into fund company relationships with third-party providers of back-office support. After we learned of the investigation last month, we initiated new Stewardship Grade coverage on JP Morgan funds and updated our grades for Pioneer offerings. (Note, neither JP Morgan nor Pioneer are under scrutiny.)

Former Bank One Funds (which have since been folded into JP Morgan) and AmSouth Funds (whose assets have since been purchased by Pioneer) are under investigation because they did business with Bisys Group BSG, a back-office services provider that has settled wrongdoing charges with the SEC. In a nutshell, the allegations suggest that Bisys charged fund shareholders higher prices for its services than competing providers, and then kicked back some of that money to the fund company.

While the kickback allegations against Bisys are disconcerting, the investigations are related to a fund shop that JP Morgan purchased and assets that Pioneer acquired after the period in question. Yet, what we found during our general review of those firms' stewardship led to concerns about JP Morgan's and Pioneer's current care of investors' capital.

Worrisome Findings
In JP Morgan's case, our research turned up some troubling issues related to the funds' board of directors. Specifically, the current chairman of the JP Morgan fund board, Fergus Reid, also serves on the board for Morgan Stanley funds. There's nothing wrong with that in and of itself, but across the two firms, Reid is responsible for overseeing more than 300 funds. We have a hard time understanding how he can give each of those offerings the degree of oversight required to ensure that shareholders' interests are protected. To be sure, we're pleased that Reid is an independent chairman. Also, he did not serve on the board of the former One Group Funds and thus is not connected to the current investigation. Still, his sizable workload leads us to wonder whether he's spread too thinly to look out for shareholders at each offering he oversees.

In addition to concerns about Reid's oversight, we're also bothered by a recent fine levied against JP Morgan's brokers for improper sales of 529 college savings plans. While the brokers have no direct ties to JP Morgan's asset-management business, which runs its mutual funds, we're concerned that overall, the firm isn't focused on strict regulatory compliance.

As for the Pioneer, we updated our Stewardship Grades for that firm's offerings after AmSouth's name came up in connection with the kickback scandal. Though Pioneer is strong in some areas and the kickback scandal is related to relationships at the AmSouth funds before Pioneer acquired them, we've identified some red flags in its corporate culture. Namely, we're skeptical of Pioneer's handling of mergers, and we're troubled by its manager turnover. For example, Pioneer Small Company was merged into Pioneer Small Cap Value PIMCX and underwent two strategy changes and three management shifts in the process.

What's more, we're also concerned about Pioneer's approach to risk control in its portfolios. We think the firm's efforts may push fund managers to be too benchmark-conscious, which can can lead to mediocrity and may help explain why many Pioneer funds have indeed failed to distinguish themselves over their peers.

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