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Oppenheimer Settles SEC Charges for $35 Million

Plus, Hennessy buys FBR, Miller takes another step toward retirement, and more. 

Morningstar Fund Analysts, 06/07/2012

The Securities and Exchange Commission this week charged OppenheimerFunds with making misleading statements about two of its mutual funds during the 2008 financial crisis. Oppenheimer agreed to pay $35 million to settle the charges. According to the SEC's order, Oppenheimer made misleading statements in the 2008 prospectus for Oppenheimer Champion Income OPCHX by not disclosing that the fund could use derivatives to such an extent that they could be the primary influence on the fund's returns. The SEC also found that Oppenheimer disseminated misleading statements to shareholders about Champion Income and Oppenheimer Core Bond OPIGX amid the financial crisis. According to the order, Oppenheimer communicated to shareholders that the funds had not suffered permanent impairments, when in fact the funds had been forced to sell bond holdings that resulted in realized investment losses.

Leading up to 2008, the management team running the two funds made overly aggressive bets on mortgage-related securities. Specifically, the managers increased the funds' exposure to commercial mortgage-backed securities by entering into derivative contracts known as total return swaps. These swaps allowed the funds to add market exposure on top of the assets on their balance sheets. Those bets unraveled in 2008, and by the end of the year, Champion Income had lost 78.5% and Core Bond had dropped 35.8%.

The horrid performance prompted Oppenheimer to sack the funds' management team and address shortfalls in its compliance and risk-management teams. Oppenheimer also announced in May that Champion Income will merge into Neutral-rated Oppenheimer Global Strategic Income OPSIX later this year.

BlackRock Manager Set to Retire
Robert Doll, one of BlackRock's BLK higher-profile portfolio managers, has decided to retire, leaving the turnaround of his struggling funds in the hands of more-recent BlackRock hires. 

Christopher Leavy, who joined BlackRock in 2010 as chief investment officer of U.S. fundamental equity, has assumed lead management of all Doll's charges. Since 1999, Doll has been managing BlackRock Large Cap Value MDLVX, BlackRock Large Cap Growth MDLHXBlackRock Large Cap Core MDLRX, and BlackRock Large Cap Core Plus BALPX. Considering that Doll's strategies have about $23 billion in total assets, it would make sense that Leavy, as CIO, would want to have a direct role in ensuring the funds' success.

However, Leavy will not be giving up his CIO position as he tackles the considerable challenge of improving the funds' performance. This is a concern. Doll's energies were also divided as he had the added time-consuming role of BlackRock's very public chief equity strategist. The large, core, and growth funds either lag or barely beat their peers over the trailing three-, five-, and 10-year periods.

The mediocre performance can be partly blamed on the fund's large quantitative component, which has struggled amid the market's volatility over the past several years. In 2010, BlackRock hired quant fund manager Peter Stournaras from Northern Trust NTRS to make improvements. The funds have yet to get back on track, but BlackRock spokespeople insist that Doll's departure is not related to the funds' performance. Doll said he is leaving to pursue personal interests after 34 years in asset management. Doll joined BlackRock from Merrill Lynch Investment Managers when BlackRock bought the firm in 2006. Doll had been president of MLIM as well as portfolio manager of these strategies. Doll will remain at BlackRock until year-end to help with Leavy's transition.

Leavy has worn the hat of lead fund manager before. He stitched together respectable records at Oppenheimer Value CGRWX between 2000 and 2008 and at what is now Invesco Van Kampen American Value MSAVX between 1997 and 2000 when he was at Morgan Stanley.

In other news, investors in the flagging large-cap value fund will get some respite as the fund's board has agreed to waive part of the fund's administrative fee, and that will knock off 5 basis points from the fund's expense.

Miller Takes Another Step Toward Retirement
Legg Mason announced Bill Miller stepped down at Legg Mason Capital Management All Cap SPAAX after a three-year stint as comanager. Lead manager Jay Leopold, who joined the fund as manager in 2007 and who has been making a majority of the stock-picking decisions since then, will remain at the helm. Miller, who is in the process of retiring, also recently stepped down from Legg Mason Capital Management Value LMVTX, a fund he had helped run for 30 years.

New Names, Other Changes at Legg Mason Funds
Legg Mason will begin stripping the firm's name from part of its fund lineup in August 2012.

The change will impact Western Asset, a Legg Mason affiliate, the most. More than two dozen retail funds will drop the Legg Mason name. (Western's institutional and closed-end funds and separate accounts already carry the Western name.) At the same time, four funds will be merged into larger offerings. Fees will drop and strategies will get slight tweaks in some cases. The move comes on the heels of Western adding additional share classes that will allow better access to the funds for institutional, retail, and retirement investors.

The Royce Funds, which never carried the Legg Mason name, and Legg Mason Capital Management funds will keep their current names. A Legg Mason spokesperson says the firm is evaluating if it makes sense to apply this policy to Legg's other affiliates, including Batterymarch Financial Management, Clearbridge Advisors, and Brandywine Global.

This isn't the first time Legg Mason has changed fund names. It rebranded most of the funds it acquired from Citigroup in 2006 and then, in 2009, dropped the "Legg Mason Partners" phrase while adding the affiliates' firm names.

In other Legg Mason news, Andrew Purdy has stepped down from managing several allocation funds at Legg Mason, including Legg Mason Strategic Real Return LRRAX and the firm's suite of target-retirement funds. Asset allocation analyst Patricia Duffy has been promoted to fill his place. Purdy is also no longer managing several of the firm's lifestyle allocation funds. Duffy and Y. Wayne Lin have been added as comanagers there alongside Steven Bleiberg, the chief investment officer of Legg Mason Global Asset Allocation.

Fidelity Shuffles Managers
Fidelity is moving portfolio manager Chris Sharpe off of Fidelity Strategic Real Return FSRRXFidelity Strategic Dividend & Income FSDIX, and Fidelity Strategic Income FSICX in order to allow him to focus more on the firm's target-date lineups.

Joanna Bewick, Sharpe's current comanager on the three funds, will take the lead role at each. Ford O'Neil, who heads up Fidelity Total Bond FTBFX, will join her as comanager. According to Fidelity, O'Neil has been an active member of the firm's asset-allocation effort, already spending a day or two a week at the team's offices in Boston.

Jeff Moore, current manager of Fidelity Investment Grade Bond FBNDX, will join O'Neil as a comanager at Fidelity Total Bond. Moore and O'Neil work closely as members of the fixed-income team's Core Plus group.

Hennessy Buys FBR
Well, that didn't take long. Hennessy Advisors HNNA announced on June 6, 2012, that it acquired FBR Fund Advisors, a family of 10 mutual funds that hold almost $2 billion in assets. It was just a week earlier that FBR revealed in an SEC filing that it hired an outside advisor to evaluate its options, "including the sale of all or a portion of the business." The acquisition is expected to close in the third quarter of 2012. A price tag for the deal was not disclosed.

The deal will drastically alter the FBR fund lineup. FBR Large Cap FBRPX, FBR Small Cap FBRYX, and FBR Mid Cap FBRMX will merge into Hennessy Cornerstone Large Growth HFLGX, Hennessy Cornerstone Growth HFCGX, and Hennessy Focus 30 HFTFX, respectively. The remaining seven funds, including FBR Focus FBRVX and  FBR Gas Utility Index GASFX, will move under the Hennessy umbrella but retain their names for now and current management teams. In addition, Dave Ellison, FBR's president and chief investment officer, will join Hennessy Advisors, as will Winsor Aylesworth, an FBR portfolio manager, and the firm's distribution, marketing, trading, and compliance teams.

The deal will give Hennessy a shot in the arm. The Hennessy lineup topped out at $2.2 billion in retail assets in 2006. Since then, though, the firm has experienced five-plus years of net outflows. While revenues at FBR had been flat the past year, the overall lineup did see a small uptick in asset inflows. For example, the Gas Utility Index fund attracted $218 million in 2011. Once the transaction closes, Hennessy's lineup will consist of 16 funds holding around $2.7 billion in assets.

PIMCO Launches New Funds
PIMCO has launched three new bond funds. Two new muni funds, PIMCO California Municipal Bond and PIMCO National Intermediate Muni Bond, will be managed by Joe Deane, who took over PIMCO's muni operation in 2011 after leading Western Asset's muni team for almost two decades. Deane currently runs all of PIMCO's muni offerings, including PIMCO Municipal Bond PFMIX. His arrival came as part of a broad overhaul of PIMCO's muni division. Since 2009, the firm has hired three new portfolio managers and six credit analysts.

The third new fund to launch, PIMCO Short Asset Investment, has been described as a shorter-duration and more-constrained version of the Gold-rated PIMCO Short-Term PTSHX

Muni-Bond Manager Steps Down
Longtime American Funds muni manager Edward Nahmias is stepping down from his three state-specific muni portfolios in advance of his retirement. At American Funds Tax-Exempt California TAFTX, which he has comanaged for 14 years, his two current comanagers, Neil Langberg and Karl Zeile, will remain at the helm. At American Funds Tax-Exempt Maryland TMMDX and American Funds Tax-Exempt Virginia TFVAX, both of which he has comanaged since 2003, his comanager, Brenda Ellerin, will remain on board and will be joined by Chad Rach. Rach joined American funds as a muni analyst in 2004 and was also recently named comanager on American High-Income Municipal Bond AMHIX.

Etc.
George Gianarikas has stepped down from managing Putnam Global Technology PGTAX and Putnam Global Utilities PUGIX and has left the firm. He'll be replaced at Putnam Global Technology by Brian Hertzog and at Global Utilities by Sheba Alexander. Jessica Wirth has departed Putnam Global Energy PGEAX and will be replaced by Greg Kelly. Comanager Steve Curbow will remain in place. 

Schwab is bringing down expenses at Laudus Small-Cap MarketMasters SWOSX and Laudus International MarketMasters SWOIX by 10 and up to 19 basis points, respectively. The company has committed to a permanent, lower cap on expenses for the two funds.

Reinhart Partners, which currently manages $3.8 billion, primarily in separate accounts, is launching its first open-end fund, Reinhart Mid Cap Private Market Value. Brent Jesko and Matthew Martinek, who currently run a separate account with an identical strategy, will take the helm.

Huntington is launching Huntington Income Generation, an income-focused fund of funds. The offering will invest in underlying funds managed by Huntington and will be led by Paula Jurcenko, who currently runs several of the firm's allocation funds.

The board of Allianz AGIC International Growth Opportunities ALOPX has voted to replace the fund's current subadvisor, Allianz Global Investors Capital Management, with RCM Capital Management. Andrew Neville, who currently helps run Allianz RCM Global Small-Cap DGSCX, will take over as lead manager and will be assisted by Dennis Lai and Koji Nakatsuka, who help him run Global Small-Cap.

David Powers will join Eagle Growth & Income HRCVX as a fourth portfolio manager alongside Edmund Cowart, David Blount, and John Pandtle. The in-house trio took over management of the fund in 2011 after the fund's board replaced the previous subadvisor, Thornburg Investment Management.

Munib Madni and Samuel Rhee have joined the team behind Morgan Stanley Institutional Emerging Markets MGEMX. In addition, comanager James Cheng announced that he would retire from the fund at the end of the year. 

Touchstone Emerging Markets Equity TEMAX has reopened to new investors after closing in February of last year.

CMG Capital Management is launching CMG Tactical Equity Strategy, which will be partially managed by CMG founder Stephen Blumenthal and partially managed by subadvisor Scotia Partners.

Ivy International Balanced IVBAX, which will soon be renamed Ivy Global Income Allocation, is now comanaged by W. Jeffrey Surles, who joins lead manager John Maxwell.

Erik Voss was added as a portfolio manager at Invesco Summit ASMMX. He'll run the fund with its current manager, Ryan Amerman.

Columbia Management has projected that fees at Columbia Strategic Allocation IMRFX will increase by between 12 and 18 basis points.  

Shareholders approved the sale of Old Mutual Heitman REIT to Fundvantage. 

Victory Value SVLSX will liquidate at the end of August. 

Mutual fund analysts David Falkof, Shannon Kirwin, Harry Milling, and Rob Wherry 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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