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Fidelity's Christine McConnell to Retire

The conservative bank-loan fund manager plans to step away at the end of March. Also, DoubleLine recruits more professionals from TCW, Principal files for permission to market actively managed ETFs, T. Rowe Price nears launch of its world-allocation fund, Vanguard to merge away a Florida muni-bond ...

Morningstar Fund Analysts, 03/28/2013

Fidelity announced on March 26 that Christine McConnell will be leaving the previously Gold-rated Fidelity Floating Rate High Income FFRHX. According to Fidelity, McConnell, who has managed this fund since its 2000 inception, plans to retire at the end of March.

McConnell had built a solid record as one of the most conservative managers in the bank-loan category, sticking with the higher-quality and more-liquid tiers of the market, and holding an at-times large stake in cash. That served the fund well when bank-loan markets turned stormy in 2008 and more recently in the third quarter of 2011, but it left the fund lagging in strong credit markets. In 2012, the fund's 6.8% return ranked near the bottom of the bank-loan category.

Eric Mollenhauer, an 18-year veteran of Fidelity's high-income group, will replace McConnell starting April 1. Like many managers in the group, Mollenhauer got his start as a high-yield analyst. Mollenhauer served a stint as Fidelity's director of high yield and is no newcomer to managing bank-loan portfolios. He's managed Fidelity's internal and institutional bank-loan accounts since 2007 and took the lead at Fidelity Series Floating Rate High Income Fund FFHCX when it was launched in 2011. Fidelity has indicated that it will consider adding additional resources to the group in the wake of McConnell's departure.

While Mollenhauer is clearly experienced and will be backed by the same extensive analyst and trading team that supported McConnell, it will take some time to see how his style differs from McConnell's. Indeed, Mollenhauer has taken a more-aggressive approach in his short time at Fidelity Series Floating Rate High Income. For now, however, Mollenhauer has said that he is comfortable with the fund's current conservative positioning, given the recent strength of the bank-loan market, which has left many names trading at or over par.

Fledgling DoubleLine Equity Team Recruits Additional TCW Defectors
DoubleLine continues to build out the ranks of its nascent equity team with former TCW employees. On March 22, the firm hired one equity trader and three equity analysts from TCW. DoubleLine also hired one analyst with prior experience at Lazard Freres and Provident Investment Counsel. The analysts will join DoubleLine's equity team, headed by portfolio managers Husam Nazer and Brendt Stallings.

Nazer and Stallings are also TCW veterans. Nazer managed TCW Small Cap Growth TGSCX from 2005 through 2012 and comanaged TCW SMID Cap Growth TGSDX from 2010 through 2012. Stallings comanaged TCW Growth Equities TGGEX from 2004 through 2012. And the pair worked as comanagers at TCW Growth TGGIX for roughly four years through 2012. Nazer and Stallings resigned from TCW at the end of December 2012 and subsequently joined DoubleLine in January 2013.

DoubleLine is poised to launch three equity offerings to be run by Nazer and Stallings. The duo will comanage DoubleLine Equities Growth and DoubleLine Equities Technology, while Nazer will lead DoubleLine Equities Small Cap Growth, according to preliminary documents filed by the firm.

Principal Financial Files for Actively Managed ETFs
On March 22, Principal Financial Group PFG submitted paperwork with the SEC seeking permission to creative active managed exchange-traded funds.

The move makes Principal the latest traditional open-end fund manager to request regulatory approval to be allowed to market actively managed ETFs. Over the past decade, Principal has significantly expanded its money-management competencies. The firm used to operate an in-house money management arm, which tended to be somewhat conservative and index-conscious. However, in recent years, the firm has acquired a collection of boutiques specializing in areas such as preferred securities, high-yield bonds, and global equities.

The Des Moines, Iowa-based firm now joins a long list of traditional fund managers and upstarts seeking permission to create actively managed ETFs. Firms that either are seeking so-called exemptive relief to be allowed to create and market actively managed ETFs or firms that already have won such relief but have not yet rolled out any active ETFs include Fidelity, Emerging Global, Natixis, Franklin Templeton, ETSpreads, Artivest, ETF Issuer Solutions, Active Relief, ProShares, Dreyfus, John Hancock, J.P. Morgan, Charles Schwab, Deutsche Bank, Salient Advisors, Millington Securities, Cambria Investment Management, Transparent Value, Wealthfront, Neuberger Berman, Georgetown Investment Management, T. Rowe Price, Eaton Vance, Federated, Legg Mason, IndexIQ, Arrow Investment Advisors, and IndexIQ.

Principal revealed that its first actively managed ETF would invest at least half its assets in a diverse portfolio of fixed-income securities. The proposed fund, which would target providing both income and long-term capital appreciation, would also be allowed to hold and trade stocks, currencies, master limited partnerships, and even volatility instruments.

T. Rowe Price to Include Alts Exposure in Its First World-Allocation Fund
T. Rowe Price TROW is wading into the world of alternative investments with the launch of the firm's first world-allocation fund. T. Rowe Price Global Allocation, expected to launch in May 2013, will use an active allocation strategy, though overall the fund's portfolio will generally consist of 60% stocks, 30% bonds, and 10% alternative investments. The alternatives sleeve may provide exposure to unregistered hedge funds or other private investment companies, according to documents filed by the firm.

The new offering will be managed by Charles Shriver, who manages seven other T. Rowe Price funds, including T. Rowe Price Spectrum Income RPSIX, T. Rowe Price Spectrum Growth PRSGX, and T. Rowe Price Balanced TRPBX.

Vanguard Looks to Merge Away Florida Municipal Bond Fund
Vanguard has proposed merging the $955 million Vanguard Florida Focused Long-Term Tax-Exempt VFLRX into the $8.2 billion Vanguard Long-Term Tax-Exempt VWLUX municipal bond fund. The proposed reorganization comes in response to Florida eliminating its state tax on intangible property, according to Vanguard. Florida residents no longer receive additional state tax benefits from investing strictly in Florida municipal bonds.

The reorganization, which is tax-free, awaits shareholder approval at a July 2013 meeting. Both funds offer a 0.20% expense ratio for investor shares and a 0.12% expense ratio for Admiral shares.

Vanguard Wellington Reports a Fee Reduction
Vanguard's oldest mutual fund has good news for shareholders. The $69 billion Vanguard Wellington VWELX reported reduced fees in 2012. The fund's investor and admiral shares reported expense ratios of 0.25% and 0.17%, respectively, a 2-basis-point reduction from 2011. This is the third consecutive year in which both share classes have reduced their expense ratios.

BlackRock Launches Small-Cap Fund
BlackRock BLK launched BlackRock Disciplined Small Cap Core BDSAX, which uses the Russell 2000 Index as a primary benchmark. The fund is comanaged by Travis Cooke, who joined BlackRock from Barclays Global Investors in 2009, and Ali Jahansouz, who has been with the firm since 2007.

SEC, Ex-Morgan Keegan Fund Directors Settle Case
The SEC this week announced that it has settled a civil case against eight onetime directors of Morgan Keegan’s mutual funds that dated back to the financial crisis and the collapse of subprime mortgage-backed junk debt.

Filed in December 2010, the case was notable because the SEC alleged that the former directors had violated their fiduciary responsibility to look out for shareholders by carelessly not paying attention to correct valuations of assets in Morgan Keegan's mutual funds. The funds had held high-yield debt that was backed by subprime mortgages, and the SEC's civil action against the eight directors was something of a wakeup call, indicating that the SEC now is willing to scrutinize the actions of fund directors and the outside consultants they hire to handle such matters as fund valuation.

In a previous, related move, Morgan Keegan, which now is part of Raymond James Financial RJF, paid $200 million in 2011 to settle fraud allegations.

Terms of this week's settlement have not yet been disclosed. The eight former directors are J. Kenneth Alderman, Jack R. Blair, Albert C. Johnson, James Stillman R. McFadden, Morgan Keegan founder and former chairman and CEO Allen B. Morgan Jr., W. Randall Pittman, Mary S. Stone, and Archie W. Willis III.

Senior fund analyst Sarah Bush and fund analysts Robert Goldsborough 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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