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Fund Times: Big Changes at DWS High Income Shop

Plus, news on Janus long/short fund launch, new Thornburg global fund, and more.

Morningstar Analysts, 08/04/2006

Deutsche Investment Management, advisor to DWS funds, announced a restructuring of the firm's high-income operation. The plan will centralize the high-yield effort, which was previously spread out over three separate teams located in Germany, Philadelphia, and New York. The Philadelphia team will be disbanded entirely, and the firm's high-yield group will now be headquartered in New York. Gary Sullivan, who previously ran high-yield funds for Deutsche in Germany, will take over lead manager responsibilities for DWS High Income KHYAX, DWS High Income Plus SGHAX, and DWS Strategic Income KSTAX from Andrew Cestone, who headed the high-yield group in Philly. Sullivan will also replace Cestone as one of the managers of DWS Balanced KTRAX and DWS Equity Income SDDAX. Cestone will be leaving the firm.

We're sorry to see Cestone go because we were quite impressed with his abilities at these funds. In fact, over the past three years, through Aug. 2, Cestone's performance at High Income has bested 90% of high-yield rivals, with an impressive 10.6% annualized gain. Sullivan, on the other hand, is an unknown quantity. He managed high-yield portfolios in Europe, but he has no record in the United States. A Deutsche spokesman noted that the restructuring was entirely business related and was no reflection on Cestone and his team, but we're not convinced that it makes good business sense to let a talented manager like Cestone go. We'll be keeping an eye out to see where Cestone lands, because there are plenty of high-yield operations in need of good talent.

Janus Launches Long/Short Fund
Janus Capital Corporation announced the launch of Janus Adviser Long/Short Fund in a preliminary prospectus filed with the SEC Aug. 1. Janus veteran David Decker, who also runs ING Janus Contrarian IJCSX and who has been with the firm since 1992, will lead the fund. Equity analysts Dan Kozlowski and Dan Riff, who have been with Janus since 1999 and 2003, respectively, will join him on the team. Kozlowski has focused on the global financial, retail, and media sectors, while Riff covers domestic health care, consumer staples, and industrials.

The fund will seek to provide high absolute risk-adjusted returns that have a low correlation to the equity market overall, according to the filing. The fund will invest in both domestic and foreign stocks and, as the name implies, will take both long and short positions in these securities. The team will not, however, seek to balance these positions in a way that would seek to be "market neutral" but rather expects to keep the majority of its assets in long-term holdings with varying levels of short positions. For long positions the team will seek "attractively valued companies that are improving their free cash flows and returns on invested capital," according to the filing, but they will also look for special situations, such as companies with improving management teams. On the short side, the team will look for "structurally disadvantaged companies operating in challenged industries with high valuations."

The fund's costs seem a bit steep. With a hefty 1.25% management fee and total expenses (including waivers) of 1.99% and 2.74% for the A and C share classes, respectively, we think other options may serve investors better. One such choice, with a similar strategy, is the Diamond Hill Long-Short DIAMX, which provides investors with experienced management, has an excellent track record, and boasts a 1.55% expense ratio, which is well below the category median.

Thornburg Offers New Global Fund
Thornburg Investment Management launched the Thornburg Global Opportunities Fund on July 28, according to a filing made with the SEC. The firm's president and chief investment officer, Brian McMahon, will lead the fund and will be aided by comanager Vinson Walden. In addition to Global Opportunities and his administrative duties, McMahon is also a coportfolio manager on Thornburg Investment Income Builder TIBAX, while Walden has been on the portfolio management teams for Thornburg Value TVAFX and Thornburg International Value TGVAX since joining the firm in 2002.

The fund will invest broadly in stocks from issuers around the world and will take a concentrated investment approach, seeking to hold between roughly 30 and 40 stocks. Thornburg has done well in the international space before. My colleague William Samuel Rocco recently pointed to Thornburg's Bill Fries as a serious contender for Morningstar's 2006 International-Stock Manager of the Year award, an honor he won in 2004. That said, after fee waivers are taken into account, the new fund will charge a maximum of 1.63% on its front-load shares, which seems a bit steep to us.

Another Week, Another Bunch of New PowerShares
PowerShares Capital Management announced in an SEC filing this week that the firm intends to launch seven new exchange-traded funds. This is PowerShares' second ETF rollout of the summer, pending approval.

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