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April's Mutual Fund Red Flags

We're on the lookout for stealth asset growth.

Morningstar Analysts, 04/18/2006

This article originally appeared in Morningstar FundInvestor, an award-winning newsletter that presents investment strategies and tracks 500 funds.

Many of the fund industry's most successful managers attract attention from not only mutual fund investors, but also institutions and high-net-worth investors, who hire them to run other types of accounts. In addition, these managers may subadvise funds from other companies. Thus, your favorite manager might be running a lot more money than you suspect.

Fortunately, funds are new required to disclose such information in their annual Statement of Additional Information. Fund shops must send that document to investors (for free) upon request, and a number of shops also feature them on their Web sites. The SAI  is generally long, but a quick check in the table of contents for "investment advisor" should take you to the right section. Below is our take on some of the more prominent managers who carry a heavy, somewhat hidden load.

Marsico Focus MFOCX, Marsico Growth MGRIX, USAA Aggressive Growth USAUX

Tom Marsico is a veteran growth investor with a stellar track record, so it may not be a surprise that he manages money outside of the three large-growth charges listed above, which have about $8 billion among them. When their assets are combined with those of the 10 other mutual funds Marsico runs, as well as various other accounts, Marsico is responsible for $54 billion.

Although that pool is divided into two strategies, one is essentially a modestly more concentrated version of the other. Between Marsico's penchant  for loading up on his favorite picks and tendency to trade around positions, there's reason to be a bit concerned about the size of his asset pool. But because most of his holdings are highly liquid stocks, we still think he has room to maneuver. That said, we'll be keeping close tabs on this situation.PAGEBREAK

PIMCO Emerging Markets Bond PEMDX

Michael Gomez, who took over this fund in October when emerging-markets guru Mohamed El-Erian left the firm, has very big shoes to fill. El-Erian had steered this $2.8 billion fund to superb results since the 1997 inception of its institutional share class.

The larger task before Gomez, however, is to help set the course for PIMCO's massive emerging-markets debt stake within broader strategies, used both in funds such as PIMCO Foreign Bond PFODX and in separate accounts. The firm recently held a total of $34 billion in emerging-markets debt. That amount could hamper Gomez's flexibility, especially in lightly traded securities.

The good news is that the asset base allows PIMCO to shape some bond offerings to its liking and gain access to key financial officials. On the flip side, it makes it more difficult for PIMCO to sell an issue and to add value through issue election. Of late, performance has slipped although it isn't clear if that's because of the fund's asset size.

Legg Mason Value Trust LMVTX, Legg Mason Opportunity Trust LMOPX

Bill Miller runs a big pot of money in his mutual funds and in separate accounts. He runs $25 billion in his funds, and his team runs another $20 billion in separate accounts. While Miller is not the day-to-day manager on those accounts, the SAI states that the funds serve as model portfolios for the accounts, thus there is likely a high degree of overlap.

It's also worth noting that Value Trust, a large-blend fund, and mid-blend charge Opportunity share more than 30% of their holdings and that Miller, like Marsico, takes big positions in his top picks. Miller's low-turnover approach mitigate our concerns for now. But a recent deal between Citigroup C and Legg Mason LM means that the former's large contingent of brokers could soon be selling these funds by the bushel, so Miller's workload bear watching.

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