Fund Times: LBO Frenzy Impacts Fund Returns

The recently announced buyouts of copper producer  Phelps Dodge  and REIT giant  Equity Office Properties Trust   have helped out a few funds, as leveraged buyouts can have a dramatic impact on a firm's stock price and, thus, on fund returns.

The day Freeport-McMoRan bid for Phelps Dodge the stock rose nearly 30%, and Equity Office Properties saw a 7% increase after the Blackstone Group made its offer. Funds that benefited from the Phelps deal include Morningstar Fund Analyst Picks  Brandywine Fund (BRWIX) and  Fairholme Fund (FAIRX), which both had sizable positions in Phelps Dodge prior to the buyout being announced. So did  Jennison Natural Resources (PGNAX) and  Neuberger Berman Partners (NPRTX). Predictably, funds that have benefited from the more modest stock price move at Equity Office include real-estate-oriented funds, such as  Fidelity Real Estate Investment (FRESX) and  Cohen & Steers Realty Shares (CSRSX).

While buyouts can often be good news for equity funds, they are typically bad for bondholders. This is because the additional leverage used to finance the deal can impair the company's ability to repay its obligations. Additionally, the credit quality of the company can deteriorate, resulting in higher borrowing costs. In the case of Equity Office Properties, however, certain bondholders should do okay. Protective covenants embedded in the bonds held by  Standish Mellon Fixed-Income , for instance, should protect them here. Manager Cathy Powers of Standish Mellon has been sensibly shifting into REIT bonds in her fund's portfolio to protect it from this LBO risk.

Turner Files for Two New Funds
Turner Investment Partners has filed with the SEC to offer two new mutual funds, Turner International Core Growth and Turner Midcap Equity. The International fund, which will only be offered in an institutional share class, will be run by Mark Turner, Christopher McHugh, and Robert Turner. The fund will primarily invest in the stock of international firms with market caps larger than $2 billion, which management believes will see improving earnings growth. Both Mark and Robert Turner run Turner Core Growth I  and other portfolios that have achieved respectable records in the large-growth category, partly due to modest investments in foreign firms.

McHugh works as the lead manager on Morningstar Fund Analyst Pick  Turner Midcap Growth  and as a comanager of  Turner Small Cap Growth . He has also contributed to the firm's research work on the telecommunications industry. The fund will initially charge a 1.10% expense ratio. While this will be the advisor's first foray into the international arena with an open-end fund, the firm has run similar institutional accounts in the past.

Turner Midcap Equity will be managed by the same team that runs Turner Small Cap Equity , Thomas DiBella and Kenneth Gainey. While the team has plenty of experience investing in mid-caps (nearly a fourth of the Small Cap portfolio currently resides in mid-cap territory), Small Cap Equity's record gives us pause, as the fund has lagged its category peers for much of its short history.

Causeway to Launch New Emerging-Markets Fund
Causeway Capital Management has announced its plans to launch Causeway Emerging Markets, a quantitatively oriented fund run by Arjun Jayaraman and Macduff Kuhnert. The fund will typically keep at least 80% of its assets in emerging-markets securities, and the quantitative model will use various fundamental, technical, and macroeconomic factors in selecting stocks.

While we'll wait and see exactly how the quantitative approach functions, we're encouraged here by the advisor's success with one of its other funds, Morningstar Fund Analyst Pick  Causeway International Value (CIVVX), and by its history of strong fiduciary responsibility to shareholders. For instance, at International Value (a nonquantitative fund), the firm began taking steps to control asset growth in the fall of 2004 and closed both the retail and institutional share classes of the fund to new investors in February 2005 in order to preserve capacity and the managers' ability to follow their discipline.

Comanagers Announced for Ariel Funds
John W. Rogers Jr., founder of Ariel Capital Management, has announced the appointment of comanagers to join him on the  Ariel Fund (ARGFX) and the Morningstar Fund Analyst Pick  Ariel Appreciation (CAAPX). John Miller, who joined Ariel Capital in 1989 and worked at Cantor Fitzgerald & Co. prior to that, will join Rogers on the Ariel Fund. Matthew Sauer, who recently joined this advisor in May 2006, will assist Rogers with the management of Appreciation. Sauer previously worked at Oak Value Capital Management from 1993 to 2006. Rogers will continue to make the final investment decisions at both funds and plans to utilize his comanagers as "sounding boards on individual stock ideas, sector weightings, and portfolio construction," according to the SEC filing announcing the additions.

Manager Changes at American Century
American Century Investment Management recently announced the departure of Jerry Sullivan from the team at  American Century Ultra (TWCUX). This change in responsibility will free Sullivan to focus on his other charge, American Century Fundamental Equity (AFDAX). Additionally, Sullivan brought analyst Rob Brookby with him to Fundamental Equity. This loss for the fund comes on the heels of Bruce Wimberly's departure from the helm of this offering after nearly a decade. Current Ultra managers Wade Slome and Tom Telford have decent experience, but these departures are clearly a loss for the fund.

 American Century Small Cap Value (ASVIX) also lost a manager. Kevin Laub, who had been a comanager of the fund since 2003, left to join a small investment firm in Ohio. Ben Giele remains, and analyst Steve Roth will fill Laub's spot.