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Fund Times

Fund Times: ICAP Funds and RS Investments Acquired

Plus, PIMCO's commodity transition, Putnam manager change, and more.

New York Life Investment Management has announced that it is acquiring Institutional Capital Corporation (ICAP), a superb Chicago-based money manager. ICAP's three mutual funds will join New York Life's MainStay fund family, and ICAP will likely subadvise other MainStay funds.

Despite posting stellar track records on funds like  ICAP Select Equity  and  ICAP International (ICEUX), for which ICAP president and chief portfolio manager Rob Lyon and his team won Morningstar's 2005 International-Stock Manager of the Year award, ICAP's funds are still quite small. The shop's funds, which have roughly $2 billion in assets among them, will now be distributed by New York Life's considerable sales force. ICAP's principals, including Lyon and Jerry Senser, have signed employment contracts with New York Life for an unknown length of time. When the merger is complete, current shareholders in ICAP funds will hold no-load I shares and will continue to pay 0.80%. But new load share classes will be rolled out. New York Life owns other small asset managers, such as MacKay Shields and McMorgan.

In addition to the impressive performance of its funds, ICAP has historically been a shareholder-friendly shop, with all three of its funds earning a Morningstar Stewardship Grade of A. We greatly hope that MainStay will take a "hands-off" approach to this acquisition, and will do nothing to compromise these funds' fine record of stewardship. Investors who want access to these funds without paying a sales charge should act with some haste, as the two parties expect the deal to close on or around June 30. Current investors, and those who open accounts before the merger is finalized, should be able to get into the no-load I shares.

In another high-profile asset manager sale, Guardian Investor Services, a division of The Guardian Life Insurance Company of America, has agreed to purchase a 65% stake in RS Investments, the San Francisco-based advisor to the RS Funds family. In a statement filed yesterday with the SEC, RS Investments said that the firm does not anticipate that the Guardian acquisition will result in any change in fund management personnel, investment objectives, or policies. However, the CEO of Guardian, Dennis Manning, has also said: "We will use Guardian's extensive distribution platform to expand the breadth and depth of RS's market penetration. The scope and scale of our distribution of RS mutual funds will bring more choices to more customers." This statement could presage a transition at RS from a no-load to a load-based fund lineup.

PIMCO Commodity Fund Makes Transition to Structured Notes
On May 17, PIMCO announced that  PIMCO Commodity Real Return  had more than $12 billion of exposure to commodities via structured notes with 18 different issuers. That represents 95% of its asset base, which is enough to place the fund in compliance with the IRS' June 30 deadline. The fund and others like it had to make the switch to structured notes after a December 2005 IRS ruling that funds could no longer use total-return swaps to get exposure to commodities (explained further here). PIMCO's transition from swaps to structured notes was swift and well executed.

Big Putnam Management Change
Putnam's largest mutual fund, the $15-billion  Putnam Fund for Growth & Income , has seen a significant change in its management team with the firing of managers Hugh Mullin and Chris Miller. The fund had seen several years of underperformance on their watch, so clearly Putnam saw it was time for change. Team members Josh Brooks and David King will remain, and will be joined by Eric Harthun, comanager of  Putnam Small Cap Value (PSLAX). Brooks also will remain as Putnam's head of large-cap investing, and King continues as comanager of  Putnam New Value . Until we see signs that this management team is gelling, from both a strategy and a stock-picking perspective, we'd stick with more-proven offerings.

Dreyfus Announces New Emerging-Markets Fund
The Dreyfus Corporation filed a preliminary prospectus with the SEC to launch Dreyfus Emerging Opportunities Fund. The new fund will invest the majority of its assets "in the stocks of companies organized, or with a majority of assets or operations, in emerging market countries." The fund will not be limited by market cap, and will use a process that combines macroeconomic perspectives with a quantitative model that looks at "valuation, currency, momentum, growth, interest rate, and risk factors" to select sector weightings against the MSCI Emerging Markets Index, the new fund's bogy. Since the emerging-markets sector has been one of the best-performing assets classes in recent years, we're not sure this is the best time to launch a fund, so investors should be wary.

Research Note: Get Rid of 12b-1 Fees
The most recent issue of The Journal of Financial Research contains an interesting article about the pernicious impact of 12b-1 fees on expenses and performance. In their conclusion, the authors, William Dukes, Philip English, and Sean Davis, write: "The intention of the SEC in instituting Rule 12b-1 in 1980 was to benefit mutual funds by decreasing the incidence of failure due to persistent net redemptions. Proponents of 12b-1 argued that existing shareholders would benefit from increased economies of scale and a resulting decrease in expense ratios. Opponents argue that 12b-1 fees would exacerbate the conflict of interest between fund managers and shareholders, and lead to higher expense ratios�. We find that the effects of 12b-1 fees on mutual fund shareholders are significantly understated�[and] that 12b-1 fees are the primary determinant of the higher expense ratios [higher even than the amount attributable to the fee]. It appears that the concerns of the opponents of Rule 12b-1 were valid and that the SEC should consider repealing Rule 12b-1."

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