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Possible DWS Sale Creates Uncertainty for Its Funds

AMR bankruptcy doesn't ground mutual funds, and more.

Morningstar Fund Analysts, 12/05/2011

Reports that Deutsche Bank is considering the sale of its U.S. asset-management division are not surprising given the disappointing record of its DWS mutual fund arm here. But a possible sale also introduces uncertainty for investors in DWS' U.S. funds.

DWS grew in the United States primarily through a string of acquisitions in the early 2000s--including the purchase of Scudder Investments in 2002. The ensuing integration was piecemeal and contributed to DWS' disparate investment culture. DWS was implicated in the market-timing scandal in 2003. Since that affair, the firm has struggled to rebuild its business and reputation in the U.S. Starting in mid-2003, when the SEC initiated its market-timing investigation, DWS funds have suffered average estimated quarterly net outflows of $682 million through October 2011, according to Morningstar data.

DWS has attempted to make its lineup more competitive by reducing its number of fund offerings and transferring management responsibilities for 10 of its equity funds, including some of its largest, to more-established management teams in Frankfurt, Germany. The lineup does have a few bright spots, including its municipal funds, but these efforts haven't been enough to tip the scales. More than half of the firm's funds rank in the bottom half of their respective categories over the past three and five years, and there are signs that the firm's investment culture has continued to deteriorate since Morningstar issued its stewardship report in 2010.

Talk that DWS' U.S. fund business is up for sale heated up after Deutsche Bank announced last week that it put its global asset-management business up for strategic review. It doesn't seem that the sale includes the DWS mutual fund businesses in Europe and Asia.

It is uncertain how a possible sale will impact DWS' U.S. funds, so investors in those funds should be vigilant for any developments that could ensue. Meanwhile, Morningstar analysts are also keeping a close eye on the situation and will be looking again at the fund family’s Stewardship grade in light of events.

Insider-Trading Probe Strikes Neuberger Berman: Reports
A Neuberger Berman analyst is a target of an insider-trading probe, according to reports by The Wall Street Journal and other news outlets Wednesday. A company spokesperson said Neuberger Berman has not been contacted by any regulators or investigators about the matter, but they put the analyst on paid leave as a precautionary measure.

The analyst, who joined Neuberger Berman in 2005, works as one of roughly 40 equity analysts with the firm, according to the spokesman. Within that larger group, the analyst serves as part of a five-member analyst team covering the technology, media, and telecommunications sectors. Portfolio managers throughout the firm were able to draw on this team's research, although the analyst did not serve any specific fund, the spokesperson said.

Wellington to Provide Welcome Relief at Hartford Total Return
Hartford has a holiday gift for shareholders in Hartford Total Return Bond ITBAX. Wellington Management, which has a long successful history subadvising fixed-income funds at Vanguard, will take the reins managing Hartford Total Return Bond in the first quarter of 2012.

The fund, which has been managed in-house since its 1996 inception, suffers from a mediocre record and above-average fees. The fund's trailing three-, five-, 10-, and 15-year returns all fall in the bottom half of its intermediate-term bond category. Wellington brings with it 42 fixed-income analysts. Wellington's seasoned management, substantial analyst staff, and established track record should benefit investors here.

American Airlines Bankruptcy Doesn't Ground Any Funds
By the time American Airlines' parent, AMR Corp., filed for bankruptcy, the company's stock was a small percentage of most mutual funds that owned it. Still, the stock fell 84% after Tuesday's bankruptcy announcement.

American Funds New Perspective ANWPX was the largest fundholder of AMR Corp. equity, as of Sept. 30. Although American Funds New Perspective's AMR stake constituted a mere 0.16% of the fund's $41 billion portfolio, that still translated to nearly 6% of AMR's outstanding stock. One of the largest institutional shareholders was Primecap Management, which held more than 12% of AMR's outstanding stock through Sept. 30. That position translated to just 0.21% of Primecap's total assets as of that date.

The Primecap fund with the highest-concentration in AMR is Primecap Odyssey Aggressive Growth POAGX, with 0.64% of assets in the stock. The fund hiked its AMR holdings from roughly 1.3 million shares to about 2.3 million shares during the first three quarters of 2010, a period when the stock's price declined by 19%. The fund continued to hold more than 2 million shares through September 2011.

Matthews Asia Launches Its First Bond Fund
After establishing itself in the Asian equities markets, Matthews Asia is testing the waters with its first fixed-income fund. Matthews Asia Strategic Income MAINX, which launched this week, will invest primarily in corporate and government bonds denominated in both U.S. dollars and local currencies. The fund's primary benchmark is the HSBC Asian Local Bond Index, which tracks local-currency-denominated, high-quality bonds in Asia ex-Japan.

Serving as lead portfolio manager is Teresa Kong, who previously served as head of emerging-markets investments at Barclays Global Investors. Robert Horrock, Matthews' chief investment officer and lead manager of Matthews Asian Growth & Income MACSX, will be comanager here. The fund's other comanager, Gerald Hwang, previously served on the management team of a number of Vanguard bond funds including Vanguard Short-Term Corporate Bond VSTBX.

Invesco shareholders approved two fund mergers and rejected a third at a Nov. 28 meeting. Invesco Value's VLUAX assets will be merged into Invesco Van Kampen Comstock ACSTX, and Invesco Global Advantage's GADAX assets will be merged into Invesco Global Growth AGGAX. However, shareholders did not approve a proposal to merge Invesco Technology Sector IFOAX into Invesco Technology ITYAX. The former, a $109 million fund, will remain in limited offering to new investors.

DWS Blue Chip's KBCAX assets will merge into DWS Growth & Income SUWAX in February. DWS S&P 500 Plus' OUTDX assets will merge into DWS S&P 500 Index SXPAX in April, pending shareholder approval.

Oppenheimer Corporate Bond OFIAX can now invest as much as 40% of its net assets in foreign issuers, doubling its previous maximum of 20%.

FPA launched its first new fund in 25 years. Former Oakmark International OAKIX analysts Pierre Py and Eric Bokota will manage the offering, FPA International Value FPIVX. FPA has capped the no-load fund's expenses at 1.35%.

Senior fund analyst Bill Rocco and mutual fund analysts Kathryn Young and Flynn Murphy contributed to this report.

Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.

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