Fund Times

Fairholme Offers to Acquire Parts of Fannie, Freddie

Morningstar Manager Research

On Wednesday, Fairholme Capital Management disclosed that it is making a long-shot offer to buy parts of mortgage giants Fannie Mae and Freddie Mac from the government.

The parts of the two government-sponsored enterprises that Fairholme hopes to buy are the portions that insure mortgage-backed securities from Fannie and Freddie.

In a statement, Fairholme CIO Bruce Berkowitz, who was named Morningstar's Domestic-Stock Fund Manager of the Decade in 2010, announced that his proposal would answer "the bipartisan call for significantly more private capital in the mortgage market." Under his proposal, Fairholme would lead a group of investors in bringing about $52 billion of private capital to support credit risk on more than $1 trillion worth of new mortgages. The proposal also would allow for the liquidation of Fannie and Freddie, ending their federal charters and concluding "the unsustainable federal conservatorship" of Fannie and Freddie.

"We know many people in and outside of government are working on the redesign of the mortgage market, and trying hard to get it right for America," Berkowitz said in the statement. "Fannie and Freddie's business model was not consistent with insurance industry best practices. However, in this country we fix valuable businesses by restructuring; we do not simply throw them away. Fairholme is prepared to do its part to help effectuate this restructuring and to be long-term owners of the insurance businesses, without the need for any Federal assistance or special Federal status."

Fairholme would offer $34.6 billion in exchange for preferred stock in Fannie and Freddie owned by a group of hedge funds. Another $17.3 billion in preferred shares would be raised in a rights offering. Berkowitz has a vested interest in Fannie and Freddie, as Fairholme currently holds preferred stock with a face value of about $3.5 billion in the two government-sponsored enterprises, which the government seized control of in 2008 as they were heading toward bankruptcy. However, those preferred shares currently are trading at less than 40 cents on the dollar. Under Berkowitz's proposal, those preferred shares would be converted to common stock at 100 cents on the dollar.

Berkowitz's bid comes amid proposed bipartisan legislation in Congress to transform the United States' $9.4 trillion mortgage-finance system. Under that proposed legislation, Berkowitz's preferred shares in Fannie and Freddie are at risk.

We view Berkowitz's bid as a long-shot at best. It would require approval from the Federal Housing Finance Agency, which currently lacks a Senate-confirmed director after Republican senators recently filibustered President Obama's nomination of U.S. Rep. Mel Watt to the job, as well as the U.S. Treasury Department and Fannie and Freddie's other investors. And given some recent comments from White House officials, it's not likely that the government would sign off on his plan.

Former Tradewinds Head Launches New Global Offering
David Iben, the former chief investment officer of Nuveen's Tradewinds Global Investors, has returned to the mutual fund world as manager of the recently launched Kopernik Global All-Cap (KGGAX).

Iben built a successful record managing Nuveen Tradewinds Value Opportunities NVOAX from 2004 to 2012 and Nuveen Tradewinds Global All-Cap NWGAX from 2006 to 2012. Global All-Cap's 8% annualized return under Iben outpaced more than 95% of world-stock peers.

Iben left Tradewinds in March 2012 to head a value team at Vinik Asset Management--a hedge fund firm founded by Jeff Vinik, former Fidelity Magellan (FMAGX) manager and current owner of the Tampa Bay Lightning professional hockey team. In May 2013, however, following a period of lagging performance, Vinik closed the $6 billion fund and returned clients' money.

In July 2013, Iben and a team from Vinik founded Kopernik Global Investors. (The firm's name was inspired by Renaissance astronomer and mathematician Nicolaus Copernicus, whose name was Mikolaj Kopernik in his native Polish.) The firm offers three strategies, though only one mutual fund: the Kopernik Global All-Cap fund, which launched on Nov. 1, 2013, and will invest at least 40% of its assets in non-U.S. stocks. The fund currently holds roughly $85 million in assets.

Fidelity Targets Interest-Rate Shy Investors With New Short-Duration Funds
With the launch of two new short-duration funds and the repositioning of a third, Fidelity is targeting investors fearful about the potential for rising interest rates.

The first fund, Fidelity Conservative Income Municipal Bond Fund FCRDX, was launched this October with a focus on the short end of the municipal-bond yield curve, targeting a weighted average maturity of less than one year. In addition to its conservative interest-rate positioning, the fund focuses on investment-grade bonds and will be limited to 10% in BBB rated fare.

Slightly further out on the yield curve on the taxable side is Fidelity Advisor Limited Term Bond (FDIAX). In late October, Fidelity repositioned the former Fidelity Advisor Intermediate-Term Bond with a short-term mandate and launched a new no-load share class. According to manager Rob Galusza, the fund typically will be run with a duration of less than three years and will focus on a mix of credit sectors including corporates, commercial mortgage-backed securities and asset-backed securities, as well as government agency-backed mortgages.

Finally, when it was launched earlier this month, Fidelity Short Duration High Income (FSAHX) joined a growing number of credit-intensive funds that target the short end of the high-yield bond universe. The fund is managed by Matt Conti, manager of Fidelity's relatively conservative entry in the high-yield category, Fidelity Focused High Income (FHIFX), and Michael Plage, skipper of Fidelity Corporate Bond (FCBFX). In addition to investing in short-term high-yield bonds, the fund also will have the flexibility to invest in floating-rate loans and short-duration investment-grade bonds.

The funds join a number of others in the Fidelity lineup with a muted interest-rate profile, including Bronze-rated  Fidelity Short-Term Bond (FSHBX) and Fidelity Conservative Income Bond (FCONX), which since its launch in spring 2011 has accumulated more than $3 billion in net assets.

Fidelity's expansion of its fixed-income lineup comes as investors have poured into bond funds with limited interest-rate exposure, particularly into nontraditional bond and bank-loan funds. Through Oct. 31, the bank loan Morningstar Category saw $54.3 billion in estimated net flows for the year to date, while $48 billion flowed into funds in the nontraditional bond category. While Fidelity offers a bank-loan fund, Bronze-rated  Fidelity Floating Rate High Income (FFRHX), the firm has not launched an unconstrained bond fund.

Edward Jones Launches Its First-Ever Mutual Fund
On Oct. 28, regional broker-dealer Edward Jones launched a proprietary, subadvised bond fund that is the firm's first-ever mutual fund. Historically known for its one-broker offices, Edward Jones launched the fund for the firm's registered investment advisor platform managed by subsidiary Olive Street Investment Advisers.

The new fund, Bridge Builder Bond (BBTBX), is managed by Olive Street but subadvised by three large asset managers: J.P. Morgan Asset Management, Robert W. Baird, and Prudential Investments.

The fund is not broadly available, however. It only is available to clients who are part of the firm's fee-based platform that was rolled out in 2008, which is known as Edward Jones Advisory Solutions and currently has total assets of $105 billion, or about 14% of the firm's assets under care. Bridge Builder Bond Fund launched with $2.8 billion in assets, but that does not represent some tremendous investor inflow into bond funds, particularly given the current outflows in the category. Instead, the $2.8 billion is part of a reallocation of client assets within Advisory Solutions. Firm officials have noted that the platform's rapid growth has meant that some Edward Jones clients hold large portions of some nonproprietary mutual funds, which can present challenges when rebalancing clients' accounts to align their portfolios with their investment goals.

The fund's launch is a departure for the privately held, suburban St. Louis-based broker-dealer, which historically has used outside money managers' funds and has not sold proprietary products.

An Edward Jones spokesman told Morningstar that no other mutual funds are planned at this time, although the firm is continuing to explore areas where they might make sense.

Edward Jones first had announced plans for the new fund back in August.

A Rarity: T. Rowe Price Launches a New Equity Sector Fund
T. Rowe Price Global Industrials (RPGIX) launched on Oct. 24. The fund will invest at least 80% of its assets in the industrials sector and at least 40% in companies located outside of the U.S. It's the first portfolio management assignment for Peter Bates, who has covered a variety of these companies as an analyst since joining the firm in 2004.

The launch is a bit unusual for T. Rowe, which is generally conservative about rolling out new funds. While the firm runs eight sector funds, all but one (Global Real Estate (TRGRX)) have been around for more than a decade. Its newest sector fund comes on the heels of other global launches, including T. Rowe Price Global Allocation (RPGAX) in May 2013 and T. Rowe Price Institutional Global Value Equity (PRIGX) in July 2012.

Lazard Rolls Out New Emerging-Markets Fund
On Oct. 31, Lazard debuted another equity fund to its stable of emerging-markets funds.

The all-cap Lazard Emerging Markets Core Equity Portfolio (ECEOX) joins several other popular stock funds that Lazard currently offers that target the emerging-markets world, including the $14.9 billion, Silver-rated  Lazard Emerging Markets Equity (LZOEX), which is closed to new investors. The firm also issues the more growth-oriented, $581 million Lazard Developing Markets (LDMOX), the $576 million Lazard Emerging Markets Equity Blend (EMBOX), and the $220 million Lazard Emerging Markets Multi-Strategy (EMMOX), which also owns bonds and other securities besides stocks.

The new core-equity emerging-markets fund is managed by Paul Rogers, Thomas Boyle, and Stephen Russell. Up to now, the three have not managed any other Lazard open-end funds, although the new fund follows an institutional strategy that they have been managing.

Manager Change at Eaton Vance Multi-Cap Growth
On Nov. 1, Eaton Vance swapped out the entire management team of its $155 million multicap growth fund.

The firm replaced Gerald I. Moore, G.R. Nelson, and Kwang Kim as managers of Eaton Vance Multi-Cap Growth EVGFX. The trio had managed the fund for exactly three years. The fund's new managers are Yana Barton and Lewis Piantedosi, who long have comanaged some other funds, including the $20 million Eaton Vance Focused Growth Opportunities (EAFGX), the $761 million Eaton Vance Tax-Managed Growth (CAPEX), and the $145 million Eaton Vance Large-Cap Growth (EALCX).

The management change comes on the heels of the retirement of Eaton Vance's equity CIO Duncan Richardson, who had been under pressure because of poor performance from the firm's in-house equity funds. Eaton Vance's CEO Tom Faust is the firm's acting CIO while they search for a permanent replacement.

Litman Gregory to Merge Away Focused Opportunities Fund
On Nov. 8, Litman Gregory announced plans to merge a $67 million stock fund into a larger fund.

Effective in December, the firm will merge Litman Gregory Masters Focused Opportunities MSFOX into the $363 million Litman Gregory Masters Equity (MSENX). In a filing, Litman Gregory noted Focused Opportunities' net shareholder redemptions during the past five years, causing asset levels to drop by almost 50% in that period. The fund also has been both heavily concentrated and volatile, and it has used fewer subadvisors (just three, picking five to seven stocks each) relative to other Litman Gregory funds, which tend to use four to six subadvisors selecting nine to 15 stocks each.

Munder Capital Management No Longer for Sale
Last week, according to news accounts, the private equity firm that owns Michigan-based Munder Capital Management decided to cancel the sale process for the investment manager.

Crestview Partners and some of Munder's managers acquired Munder, which manages about $16 billion in assets, from Comerica in 2006 in a leveraged buyout that was valued at just more than $300 million. Munder now runs 11 mutual funds, the largest of which is the $5.9 billion, Bronze-rated  Munder Mid-Cap Core Growth (MGOAX).

Back in July, Crestview began seeking buyers for Munder. It had sought bids of $350 million to $400 million, which amounted to 10 times EBITDA. However, no bidder offered more than 7 times EBITDA, according to one news account, and many of the bidders were other private equity shops.

Senior fund analysts Sarah Bush, Greg Carlson, Katie Reichart, and Gregg Wolper and fund analysts Robert Goldsborough and Flynn Murphy contributed to this report.

Morningstar Manager Research does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.