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Third Avenue Ups Its Distress Game

Upromise, Nevada drop Vanguard, hire State Street.

Morningstar Fund Analysts, 02/17/2012

Third Avenue Management is upping its game when it comes to its distressed-investing efforts. The firm announced that it is making an equity investment in Millstein & Co., a firm created in the fall of 2011 by Jim Millstein. Millstein is most recently known for his work with the U.S. Department of the Treasury as its chief restructuring officer, where he helped restructure the U.S. government’s investment in American International Group AIG. He has a long history of working with distressed investments--a pond in which he is a big fish.

Third Avenue Funds and the fund family's founder, Marty Whitman, have long and successfully practiced the art of distressed investing. Whether doing something as simple as buying the still-performing loans of troubled companies to capital infusions to taking a company all the way through bankruptcy and coming out equity owners, Third Avenue has experience here. Whitman and his colleagues sometimes hold such investments in the firm's mutual funds and in 2009 launched Third Avenue Focused Credit TFCVX to more fully take advantage of such opportunities. The firm also has a small limited partnership that invests in distressed debt.

To date, Millstein & Co. has been involved primarily in the advisory business. Its partnership with Third Avenue, though, will eventually lead to the creation of private equity funds or similar vehicles. Those funds will be more directly involved in corporate restructurings and, potentially, mergers and acquisitions down the road. Third Avenue's mutual funds get something out of this deal, too, though: Millstein can help with the sourcing of ideas and, importantly, with access to deals. In distressed investing, often it is whom you know.

Upromise 529 Plan Drops Vanguard, Hires State Street
Nevada and Upromise said this week they will replace the lineup of Vanguard investment options in their Upromise College Fund 529 Plan with a suite of investment options from State Street Global Advisors. The new lineup will feature SPDR exchange-traded funds, including age-based portfolios that use State Street's tactical asset-allocation strategies to shift among ETFs based on short-term market expectations. Sallie Mae Bank will continue managing the plan's savings portfolio. The plan, which will change its name to the SSGA Upromise 529 Plan, will transfer current investors' assets to similar State Street age-based or static investment options on April 16, 2012. The plan will remain part of Upromise's rewards program, which directs a fraction of participants' spending at certain retailers into the 529 plan.

Competition in the 529 plan industry drove the state to make the change. Vanguard has investments in more than a dozen 529 plans. Its nationally marketed namesake plan, The Vanguard 529 Plan, is also based in Nevada and offers the same investment options as the Upromise plan but with a $3,000 minimum investment and significantly lower fees. Several other plans in different states also offer the same Vanguard investments at lower costs. Morningstar currently rates the Upromise plan Below Average because of its high fees but will revaluate it later this year.

Based on preliminary documents for the new plan, total costs for investors will fall slightly with SSgA. The age-based options will have a total expense ratio ranging from 0.45% to 0.55%, which is down from the current 0.57% fee. Under the new plan, Upromise will cut its program-management fee in half to 0.22% from 0.45%, but the SSgA investment-management fee will be higher than Vanguard's.

Despite the lower costs, there are some risks. The Vanguard investments, for example, are all broadly diversified core holdings, but the new SSgA options include some more narrowly focused, volatile ETFs, such as SPDR S&P Emerging Markets Small Cap EWX and SPDR Barclays Capital High Yield Bond JNK. SSgA will need to educate investors how to use these ETFs within a broader portfolio.

Using tactical allocation in the age-based options also could be risky. Although the SSgA team is experienced, such moves are difficult to get right consistently over the long term.

This isn't the first 529 plan to feature ETF-based options. In 2007, iShares and Arkansas launched the Arkansas iShares 529 plan. That advisor-sold plan, however, has been slow to attract assets. As of the end of 2011, the iShares plan has less than $100 million in assets, making it the eighth-smallest plan out of 83 in the industry. The SSgA plan will be direct-sold, so individual investors can gain access to the plan without a financial advisor. SSgA will also market the 529 plan to registered investment advisors, most of whom steer their clients' assets to direct-sold 529 plans.

Wells Fargo Hires ex-Franklin Templeton Skipper
Wells Fargo didn't make many headlines in January 2012 when it bought a small investment shop called EverKey Global Partners. But the ripple effect of that deal is now showing up in the firm's mutual fund lineup. EverKey founder Jeff Everett was named comanager of Wells Fargo Advantage International Equity WFEAX and Wells Fargo Advantage Diversified International SILAX. He's not new to the retail mutual fund universe. Before launching EverKey in 2007, Everett was a chief investment officer at Templeton Global Advisors and the lead portfolio manager at Templeton World TEMWX for 14 years. During Everett's tenure, the fund gained an annualized 12.5% versus 10.5% for the world-stock category average (although given Templeton's analyst-driven, team-based approach, it is difficult to attribute that entire performance to his stock-picking alone). EverKey's 11-member team also joins Wells Fargo, including Dale Winner, a Templeton veteran who will serve as comanager on the funds with Everett. Everett and Winner will be based in the Bahamas.

The announcement will have differing impacts on the two funds. Everett and Winner will replace manager Francis X. Claro, who has run International Equity and Diversified International since 1999 and 2009, respectively. During his stint at International Equity, Claro helped post an annualized 1.8% compared with 0.4% for the foreign large-blend peer group. But the fund hit a bit of a rough patch in terms of category rankings since Claro became the lead manager in 2007. While Everett and his team will have sole responsibility for International Equity, their impact at Diversified International won't be felt as much because they will join subadvisors LSV Asset Management and Artisan and other Wells Fargo managers. Claro, meanwhile, will remain at Wells Fargo Global Opportunities EKGIX, a fund he has run since 1999 to solid results.

Wells Fargo also announced it will liquidate Wells Fargo Advantage Social Sustainability WSSAX and Wells Fargo Advantage Global Health Care EHABX on or about March 28, 2012. In addition, the fund family's board of directors approved the merger of Wells Fargo Advantage Strategic Large Cap Growth ESGAX into Wells Fargo Advantage Large Cap Growth STAFX. Both funds are run by the same management team, although the annual fees in Wells Fargo Advantage Large Cap Growth are slightly higher than those at the fund being merged away. The move should occur in June 2012, pending shareholder approval.

AllianceBernstein Sheds Analysts, Managers
AllianceBernstein has cut 22 global analyst positions as it attempts to reduce costs and eliminate redundancies, and a few funds will change managers at the end of the quarter. The total number of global equity analysts is now 84, with the biggest cuts occurring on the growth side. Frank Caruso's team will take over AllianceBernstein Large Cap Growth APGAX, a Negative-rated fund that has experienced inconsistent performance and a slew of manager changes. Caruso has amassed a decent record during his 12 years at AllianceBernstein Core Opportunities ADGAX but has produced mediocre results at AllianceBernstein Growth & Income CABDX since 2005. His management style also differs considerably from the previous team's, raising some uncertainty about how the fund will be managed in the future.

Eric Franco is taking over AllianceBernstein Global Real Estate ARIIX, with Teresa Marziano's team leaving the firm at the end of the quarter. Franco will remain a member of the management team running AllianceBernstein International Value ABIAX and AllianceBernstein Global Value ABAGX, which has added Avi Lavi and Takeo Aso to its roster. Jean Van De Walle is taking over for Richard Chow on AllianceBernstein Greater China GCHAX.

Hartford Moves Funds to Wellington
Hartford is delivering on its effort to make Wellington Management its primary subadvisor. Hartford will hand over day-to-day management of Hartford Total Return Bond ITBAX in March 2012 to Wellington. Now, the fund family's board of directors has approved moving a total of 11 funds over to Wellington. Later this year, it is also expected to vote to transition an additional 17 funds to the Boston-based investment firm. That wave will include with Hartford Floating Rate HFLAX and Hartford Floating Rate High Income HFHAX, comanaged by Michael Bacevich. While Bacevich is expected to join Wellington and continue as manager at both offerings, going forward his colleagues at Hartford's broader bond team will focus on running assets outside retail mutual funds.

It is unclear what impact the management change will have on the Hartford funds. Most of the 11 offerings that are currently being transferred have uninspiring track records. Meanwhile, Wellington is the lead manager on Gold-rated Vanguard GNMA VFIIX and Silver-rated Vanguard High-Yield Corporate VWEHX.

Brandywine Manager Steps Down
Friess Associates, the subadvisor for Brandywine BRWIX and Brandywine Blue BLUEX, announced John Ragard is no longer a named manager on the funds. He remains at the firm in an investment capacity. Ethan Steinberg joins William D'Alonzo and Scott Gates as named managers on the funds.

Bridgeway to Merge Away Two Funds
Pending shareholder approval, Bridgeway will merge Bridgeway Aggressive Investors 2 BRAIX into Bridgeway Aggressive Investors 1 BRAGX and Bridgeway Micro-Cap Limited BRMCX into Bridgeway Ultra-Small Company BRUSX. Assets at both sets of funds, which each use similar strategies, have dwindled because of poor performance the past several years. It's unclear whether shareholders in the merged-away funds will get a better deal in the new funds, but it's likely since Bridgeway has fee breakpoints for certain asset levels.

Former Matthews Asian Growth & Income MACSX comanager Andrew Foster launched his own firm last year and now is rolling out the shop's first mutual fund, Seafarer Overseas Growth & Income. The Matthews fund had solid results during Foster's tenure. His new charge will be allowed to invest across the emerging-markets landscape, in stocks, convertible debt, and bonds.

Invesco Small Companies ATIIX will close to new investors on March 5, 2012. The fund gained 8.2% in 2011, catapulting it to the top of the small-blend peer group (which lost money on average last year). The performance attracted $352 million in inflows, nearly doubling the fund's size. In a news release, the firm said asset inflows have made maintaining the fund's mandate "increasingly difficult." Meanwhile, Invesco also said it will reopen Invesco Real Estate IARAX to new investors on March 16.

JPMorgan Asia Equity JAEAX continues to reshuffle managers. When lead manager Andrew Swan left the firm for BlackRock in 2011, his comanagers Joshua Tay and Pauline Ng remained onboard and were joined by Patrick Chiu. Now, Tay and Chiu have departed and are being replaced by managing directors Edward Pulling and Howard Wang. Ng remains a manager.

Fidelity continues to pay more attention to dividends. In May it will launch Fidelity Advisor Global Equity Income. The move comes after the Boston-based firm updated the mandate of Fidelity FFIDX to include an emphasis on dividend-paying stocks.

Old Mutual Capital shareholders approved the sale of Old Mutual's equity and allocation funds to Touchstone Advisors. The 14 funds will keep their current management teams and investment strategies, but the names and tickers will change.

The $706 million Delaware Large Cap Value DELDX will merge with the $640 million Delaware Value DDVAX. Both funds have been managed in a similar style by the same team for more than six years. Value charges 1.10% versus 1.18% for Large Cap Value, so investors will get a fee break.

ING will take management of ING U.S. Bond Index Portfolio ILBAX in-house, replacing subadvisor Neuberger Berman, who has managed the fund since its inception in 2008. The fund has ranked in the category's bottom quartile in two out of the past three calendar years.

ING also announced that Delaware Management Company's Liu Er-Chen and JPMorgan's George Iwanicki and Anuj Arora will manage a fund created by the merger of ING Emerging Countries NECAX and ING Emerging Markets Equity IEMHX. The managers currently run Emerging Countries and will use a similar style at the combined entity.

Kim Galle has departed from the team behind Pioneer Research PATMX, which she had comanaged with three others since 2006. Her three colleagues will remain onboard.

Schwab has replaced Dionisio Meneses Jr. as head of Schwab Global Real Estate SWASX with Paul Alan Davis. Meneses took over the fund in June 2007, presiding over an annualized loss of 6.1% that nonetheless beat 60% of the competition. Davis joined Schwab in 2003 and has been named on several funds, including Schwab Core Equity SWANX and Schwab Dividend Equity SWDSX, since 2006.

SEI has fired Artisan Partners as a subadvisor on SEI Institutional International Trust Emerging Markets Equity SIEMX, reducing the number of subadvisors to seven from eight.

Fidelity will lower by 6 basis points the expense ratio for all share classes of Fidelity Advisor Global Capital Appreciation FGETX.

John Hancock Funds has lowered expenses by 10 basis points for A shares and by 2 basis points for the B and C share classes of John Hancock Government Income JHGIX.

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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