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Fidelity and BlackRock Broaden ETF Partnership

Fidelity has more than doubled the number of commission-free iShares ETFs available through Fidelity's brokerage platform. Also, Joe Balestrino to leave Federated, a host of manager changes at Winslow Capital, Prudential cuts ties with Marsico, and fund closings at Touchstone and Prudential.

Morningstar Fund Analysts, 03/14/2013

On Wednesday, March 13, Fidelity and BlackRock announced they are expanding the suite of iShares exchange-traded fund products available through Fidelity's brokerage platform. Since the two firms established their partnership three years ago, the number of passively managed iShares ETFs available commission-free on Fidelity's platform has risen to 30 from 25. Now, the companies are more than doubling that lineup to 65 ETFs total, increasing the assets covered by the partnership to encompass 18% of all industry assets.

In addition, Fidelity is expanding access to the iShares lineup to new audiences. Registered investment advisors will be able to buy and sell the funds commission-free in their clients' accounts through the company's Institutional Wealth Services channel. The two firms are also collaborating to develop ETF wrap solutions, which will be available through Fidelity's Portfolio Advisory Services channel.

Fidelity also emphasized that the partnership with iShares is limited to passively managed strategies. Fidelity is currently working on an in-house lineup of actively managed and "smart beta" ETFs, which have not yet launched.

Long-Tenured Bond Manager Balestrino to Leave Federated
Federated announced last week that Joe Balestrino will leave the firm, effective April 15, 2013. Balestrino currently serves as the firm's head of domestic investment-grade corporate bonds and is the lead manager on several bond funds, including flagship Federated Total Return Bond FTRBX. While Balestrino's departure is a loss, Federated's remaining fixed-income team members have plenty of experience working together, with an average tenure of 20 years at the firm. Donald T. Ellenberger, who heads Federated's yield-curve committee and currently manages government-bond and mortgage-backed-bond strategies, will take his place on Federated Total Return Bond. In addition, Mark E. Durbiano will take over the lead of Federated Strategic Income STIAX; Brian S. Ruffner will take the lead of Federated Bond FDBAX; Bryan J. Dingle will take the lead of Federated Intermediate Corporate Bond FIIFX; and Ihab L. Salib will serve as lead on Federated Unconstrained Bond FUBDX.

From October 1996 through February 2013, the fund's 6.5% annualized return outperforms its typical peer on an absolute and risk-adjusted basis. Still, during the past four calendar years, the fund has been unable to break past its category median. As lead manager, Balestrino has been responsible for sector rotations within the fund, and it can be difficult to time those shifts correctly.

Morningstar's fund analysts have placed Federated Total Return's rating "Under Review" until we have spoken with the new lead manager and gained a better understanding of how the fund will be run going forward.

Manager Changes at Winslow Capital
Winslow Capital, subadvisor to Bronze-rated MainStay Large Cap Growth MLAAX, has announced changes to its management team. Justin Kelly, senior managing director and portfolio manager, will be named chief investment officer, assuming the role from chief executive officer and founder Clark Winslow. Winslow will continue to serve as CEO and remain involved with investment management. Patrick Burton has been promoted to comanager of MainStay Large Cap Growth. Burton joined the firm in 2010 as an analyst covering the technology sector and has more than 30 years of investment experience.

In addition, Winslow Capital senior managing director and portfolio manager R. Bart Wear will be retiring from the firm, effective July 1, 2013. Wear served as comanager on MainStay Large Cap Growth and covered the financials sector for the subadvisor. Winslow Capital has hired former Thrivent Financial senior equity research analyst Stephan Petersen to take over coverage of financials stocks.

Touchstone Closes 2 Funds to New Investors
Bronze-rated Touchstone Sands Capital Select Growth PTSGX and Silver-rated Touchstone Sands Institutional Growth CISGX will be closed to new investors effective April 8, 2013. Current shareholders may continue to add to an existing account.

The funds are subadvised by Sands Capital Management, a boutique investment firm that was founded in 1992 and is well-known in institutional circles. The employee-owned firm focuses exclusively on concentrated growth-equity strategies and managed roughly $25 billion for institutional accounts as of Dec. 31, 2012.

The two identically managed funds are highly concentrated strategies with less than 30 holdings each and more than half the portfolio is stashed in the top 10 positions. The funds have been top performers in the large-cap growth category in recent years, as well as over the long haul, and have experienced significant asset growth as a result. The two funds have amassed nearly $7 billion in assets as of Feb. 28, an increase from $1.5 billion three years ago.

Due to the concentrated nature of the funds, the team had discussed closing the funds to new investors if asset growth continued to ensure that the team's investment process would not be compromised and that the funds maintained sufficient liquidity. It’s both a sensible and shareholder-friendly move.

Touchstone has also announced that Touchstone Merger Arbitrage TMGAX will be closed to new investors effective April 8. The fund, subadvised by Longfellow Investment Management, has grown to roughly $500 million since its 2011 inception. The filing states that limiting the fund’s size will enable it to participate meaningfully in smaller-sized mergers and acquisitions.

Prudential Removes Marsico
Prudential is the latest advisor to cut ties with Marsico Capital Management. This week the firm announced that it would be replacing Marsico with MFS as the large-cap equity manager on at least one of its three target-date funds. MFS will take over management of Marsico's sleeve at Target Conservative Allocation PCGAX. Meanwhile, Prudential has proposed handing over all of Target Moderate Allocation's PAMGX assets to Quantitative Management Associates, and merging Target Growth Allocation PHGAX into Bronze-rated Prudential Jennison Equity Income SPQAX. If shareholders don't approve those moves, the company will simply hand over the U.S. large-cap equity sleeve managed by Marsico at those funds to MFS as well. 

Prudential's announcement follows a string of similar announcements in late 2012. Last year, John Hancock, Northern Trust, Harbor Funds, and ING removed Marsico as the subadvisor on several funds. The asset manager has struggled since the financial crisis due to heavy outflows and significant investment team turnover. Total assets under management stood at $27 billion at the end of February, roughly one fourth of the firm's level in 2007.

Still, some institutional investors are standing by Marsico. Litman Gregory has kept the firm as a subadvisor on the Gold-rated Litman Gregory Masters International MSILX, even as it removed another subadvisor, Mastholm Asset Management, out of concern over firm-related risk, in 2012. (Litman Gregory recently added Lazard Asset Management and Wellington Management Company to that foreign large-blend fund's lineup, raising the number of subadvisors on the roster to seven.) The firm's research analysts explained in January that they have confidence in Marsico's remaining managers and believe the firm's culture remains sound.

Prudential Closes Mid-Cap Growth Fund
Bronze-rated Prudential Jennison Mid Cap Growth PEEAX will close to new investors on April 8, 2013. The fund's assets have grown substantially over the past three years from under $2 billion at the beginning of 2010 to over $8 billion as of February 2013. Manager John Mullman made the shareholder-friendly decision to close the fund to new investors in order to preserve the fund’s ability to navigate the mid-cap growth market.

Senior fund analysts Karin Anderson and William Samuel Rocco and fund analysts Michelle Canavan, David Falkof, Robert Goldsborough, Shannon Kirwin, and Kathryn Spica 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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