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Fairholme Sells AIA, Raises Cash Position

Franklin Resources fills void left by a manager's death, Vanguard's Sauter retires, and more. 

Morningstar Fund Analysts, 06/28/2012

Fairholme FAIRX has taken major steps to strengthen its firewall against outflows and increase its flexibility. In order to boost liquidity, manager Bruce Berkowitz told Morningstar that last week he finished selling the fund's position in Hong Kong-based insurer AIA Group AAGIY. That stock claimed 14% of assets as of February 2012. That sale increased the fund's cash weighting from less than 5% in February to 18% as of June 27, 2012. This is more in line with the fund's historical cash range. From 2000 to 2010, cash was typically 10%-20% of assets, which helped dampen volatility and gave the fund substantial flexibility. Berkowitz sold AIA, as well as China Pacific Insurance Group in January 2012, based largely on valuation, believing that the fund's existing U.S.-based holdings offered better value.

The sales make the equity portfolio even more concentrated in its remaining 10 or so holdings, but the increased cash brings greater overall stability. It also makes it less likely that Berkowitz will need to sell additional positions to meet future redemptions. The fund has already sold a handful of holdings over the past 15 months to meet $9 billion in outflows. Recall that these outflows stemmed from the fund's horrific 2011 as its financials positions, such as AIG AIG and Bank of America BAC, cratered and the fund dropped 32.4% that year. However, even though outflows continue, they have slowed substantially from 12 months ago. Outflows averaged more than $1 billion per month from April 2011 through August 2011. This forced Berkowitz to sell stocks that he would have rather hung onto. Outflows have declined to an average of $150 million during the past three months through May 2012 as the same stocks that tanked last year, along with Sears Holdings SHLD, have rebounded so far in 2012, pushing returns up 20.6% through June 27, 2012.

The additional cash also gives the fund dry powder to take advantage of new opportunities. The fund has made a lot of money over the years by providing liquidity to companies, such as General Growth Properties GGP and AmeriCredit, during market stress. Berkowitz is also confident that he now has a core group of shareholders with the long-term horizon to match his own.

Franklin Resources Fills Void Left By A Manager's Death
Franklin Resources BEN, home to the Franklin, Templeton, and Mutual Series fund families, announced that three people will temporarily fill the chief investment officer role at Templeton while it looks for a replacement for Gary Motyl, the previous CIO who died last week. Norm Boersma, president of Templeton Global Advisors Limited; Cindy Sweeting, director of portfolio management at Templeton; and Heather Arnold, the director of research, are absorbing Motyl’s duties for now. Sweeting and Boersma worked closely with Motyl in a leadership capacity for over a decade. A new CIO will be named in the coming weeks.

Motyl's loss will be felt across the Templeton lineup. He was the third investment professional hired by legendary manager Sir John Templeton, who later sold his firm to Franklin Resources. Over a 30-year career, Motyl held various positions at the firm and had been CIO since 2000. He helped oversee over $180 billion in institutional and retail assets. Motyl's unexpected death should not affect most of the firm's funds, which are largely analyst-led. But Morningstar has put the Analyst Rating of Templeton Institutional Foreign Equity Series TFEQX, where Motyl was a key manager, Under Review after previously rating it Silver.

Vanguard's Sauter to Retire
Vanguard CIO Gus Sauter will retire at the end of the year. Since 1987 Sauter managed many of the family's equity index funds, developed its active quantitative stock strategies, and spearheaded the launch of the firm's exchange-traded funds. Vanguard managing director Tim Buckley, a 21-year veteran of the firm, will take over Sauter's roles. Buckley lacks Sauter's investment experience but has been a long time member of Vanguard's Portfolio Review Group. Click here for more.

JPMorgan Liquidates Fund
JPMorgan's JPM fund board agreed to liquidate the lackluster JPMorgan Asia Equity JAEAX on July 20, 2012. The fund's trailing 10-year record ranks in the bottom decile of the Pacific/Asia ex-Japan Stock category. It also saw six comanagers take turns at the helm the last three years. The fund had lost $1.1 billion to redemptions the last 30 months, shrinking the asset base to $750 million. Its current managers will remain at the firm.

In addition, JPMorgan Asia Pacific Focus has changed its name to JPMorgan Asia Pacific JASPX. The management of the team will be Mark Davids and Geoff Hoare.

DWS Pulls For Sale Sign
After months of negotiations, Deutsche Bank DB will not sell any part of its asset-management business, which included the DWS mutual fund lineup in the U.S. Deutsche Bank also said it would not sell RREEF, the firm's global alternative asset-management business. This ends a process that began in November 2011, when Deutsche Bank began a strategic review of its global asset management business and flirted with a list of suitors that included Guggenheim Partners. In February 2012 the firm entered into exclusive negotiations with Guggenheim over parts of the asset-management business, including DWS. But DWS was dropped from the discussion in May, as negotiations narrowed to focus solely on the RREEF business. Deutsche Bank officials have not commented on the end of negotiations with Guggenheim. However, firm officials said in a press release that they expect to provide further updates on the fate of the asset-management division in September.

Etc.
PIMCO filed to launch Worldwide Fundamental Advantage TR Strategy. The fund will invest in derivatives to provide exposure to a proprietary global long/short equity index. No manager was named in the filing.

Fidelity's board of trustees has agreed to reorganize Fidelity Mid Cap Growth FSMGX into Fidelity Stock Selector Mid Cap Fund FSSMX. Effective June 29, 2012, the Mid Cap Growth fund will no longer accept new purchases. The reorganization is expected to take place on Dec. 14, 2012. The management teams at the two funds have overlapped since April 2012.

Federated Market Opportunity FMAAX will change its name to Federated Prudent Absolute Return fund on Aug. 1, 2012. The new name reflects changes to the fund's mandate and management made in 2009 and 2010, respectively. In addition, Federated FII sent a proposal to shareholders to approve the reorganization of Federated U.S. Government Bond FEDBX into Federated Total Return Government Bond FTGSX.

Tom Brakel will replace Jonathan Gold as comanager on Federated Kaufmann KAUAX and will also join the management team of Federated Kaufmann Small Cap FKASX. Brakel has comanaged Federated Kaufmann Large Cap KLCAX since June 2009.

Long-time manager Tom Huggins is no longer listed as manager of several funds at Eaton Vance EV, including Eaton Vance Income Fund of Boston EVIBX. Michael Weilheimer will continue to manage the funds.

Paul Arnold was added as a portfolio manager of the Pioneer Ibbotson Asset Allocation series, including the Pioneer Ibbotson Growth Allocation fund GRAAX. He joins Scott Wentsel and Brian Huckstep. Peng Chen, who recently resigned as president of Ibbotson, is no longer listed as day-to-day manager. Arnold has worked with Ibbotson since 2007. Full disclosure: Morningstar MORN owns Ibbotson Associates.

Northern Trust filed a prospectus for a new multimanager global listed infrastructure fund. According to the filing, the fund will be managed by Christopher Vella and Jessica Hart of Northern Trust NTRS, Sam Arnold and Craig Noble of Brookfield Investment Management, and Brad Frishberg and Andrew Maple-Brown of Macquarie Capital Investment Management.

Paul Langlois was added as a portfolio manager to Lord Abbett High Yield Municipal Bond HYMAX and Lord Abbett California Tax Free LCFIX. He joins Daniel Solender on both funds. Langlois joined Lord Abbett in 2009 after having previously worked at J&W Seligman.

Brian Pessin will no longer be listed as a portfolio manager on Lazard International Strategic Equity LISIX or Lazard International Small Cap Equity LZISX, effective July 31, 2012.

Mutual fund analysts Kevin McDevitt, Flynn Murphy, Kathryn Spica 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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