Fund Times: Veteran Manager of Vanguard Funds to Depart

 Vanguard Wellesley Income (VWINX) and  Vanguard Equity-Income  (VEIPX) manager John Ryan will leave those funds on June 30, 2008, as he takes on new duties at the London offices of subadvisor Wellington Management. He will be replaced by W. Michael Reckmeyer III, a Wellington veteran who has been with the firm since 1994, and who worked as an analyst supporting Ryan.

We're encouraged that Reckmeyer both has experience with Ryan's value-oriented, dividend-focused, approach, and that he'll be running the fund with Ryan over the next year. We expect this successful approach, long used at the two funds, should not change under Reckmeyer's leadership. Other managers who run big slices of these funds remain. Wellesley Income's fixed-income portfolio, which comprises more than half of fund assets, is run by Wellington bond veteran Earl McEvoy. Equity-Income's James Stetler of Vanguard's Quantitative Equity Group runs nearly 40% of that portfolio. While there's no question Ryan's departure will be a loss, Wellington has carried off such transitions well in the past, and should do so again. (Read more about Vanguard in our Vanguard Fund Family Report.)

Templeton Veteran to Leave Shop, Funds
At the end of September 2007, Jeff Everett is leaving Franklin Templeton. Everett, who had been with the investment shop since 1989 and had served as co-CIO of its Global Equities group since August 2000, is leaving to "pursue other opportunities." Everett's departure comes as his charge,  Templeton Foreign (TEMFX), has endured a multiyear slump, compared with other foreign large-value funds.  Templeton World (TEMWX), which Everett also manages, has had a better showing in the world-stock category.

Tucker Scott, recently added to the Templeton Foreign team and lead manager on  Templeton Foreign Smaller Companies  and  Templeton Global Smaller Companies (TEMGX), will take the lead role on Templeton Foreign. Considering the team investment approach and central approved stock list long used at Templeton, we don't expect any substantive change in the fund's strategy or portfolio construction.

Templeton World will be managed as more of a combined effort among existing managers Murdo Murchison, Lisa Myers, and Tucker Scott, though Murchison will officially be named the lead manager. Murchison, Myers, and Scott are all well versed in Templeton's signature value approach, which often takes the funds to unloved or ignored areas of the global markets in the search for good bargains.

Large Funds Hold Up Nicely amid Subprime Crisis...
Subprime problems have hit a few funds quite hard but for the most part, the average fund investor probably doesn't have much cause to panic. To get a handle on what's going on with the big funds, we looked at the performance of the 10 largest actively managed funds, and despite the turmoil, they look just fine. As of Aug. 15, most of the funds were still in the black for the year, and bringing up the rear is  Dodge & Cox Stock (DODGX), which owns some financials, but its 1.3% loss is only a hair below the large-value average. On the plus side,  Fidelity Contrafund (FCNTX) is holding up with a 4.4% gain thanks to growth names such as  Google (GOOG),  Apple (AAPL), and  Schlumberger (SLB). One reason the biggest funds have fared so well is that they are big. Many of the hardest-hit subprime-linked stocks are small caps, and giant funds couldn't buy them if they wanted to.

For the trailing four weeks, three of the 10 largest funds have produced strong top-quartile returns:  American Funds Investment Company of America (AIVSX),  PIMCO Total Return (PTTRX), and  American Funds Washington Mutual (AWSHX). Investment Company of America benefited from a big cash stake, a light financials stake, and some nice bets in tech and energy. PIMCO Total Return had avoided corporate bonds because Bill Gross and the PIMCO team believed that corporates were not paying sufficient yield to justify owning them over Treasuries, and it looks like the market is coming around to Gross' view. We're particularly pleased with American Funds Washington Mutual's performance. Although investors have been redeeming the fund, we've advised people to stick with this dividend-focused stalwart. Once more the fund has come through in a down market.

We should note that there was one big fund--though not among the 10 largest--that lost a bit because of subprime mortgage exposure.  Fidelity Puritan (FPURX), a balanced fund that plugs into the same Fidelity bond team that got into trouble with subprime debt at  Fidelity Ultra-Short Bond , had a bit of subprime exposure, according to its February shareholder report. However, the fund's performance for the trailing four weeks and year to date are right in line with the moderate-allocation average.

...But at Least One High-Yield Fund Doesn't
Morgan Asset Management recently announced, in a filing with the SEC, that its  Regions Morgan Keegan Select High Income Fund , which has seen returns plummet (down nearly 33% year to date) this year due to subprime exposure, is facing a serious liquidity crisis. As we've discussed elsewhere, one of the biggest problems with holding subprime-exposed asset-backed securities is the fact that they're currently not trading. Or, if they do trade, the prices being placed on lower- and mid-quality tiers of subprime debt are extremely low. These market conditions put Select High Income's manager, Jim Kelsoe, in a very difficult position, as the fund is also experiencing significant net redemptions, according to the filing. That creates a situation where Kelsoe may be forced to sell securities into an illiquid market to raise cash to meet redemptions, which could result in even greater losses than we've seen so far. Also, the firm has announced that it will hire an independent valuation consultant to help determine the fair value of the fund's subprime asset-backed issues, since recent market conditions and low levels of liquidity have made the securities more difficult to value.

Beyond Subprime: Muni Offering Sees Illiquidity Too
Subprime mortgage trouble has gotten all the attention recently, but other areas of the market can see credit trouble too, even the municipal market. Muni national short-term offering  Calvert Tax-Free Reserves Limited-Term , has seen three separate unrated issues either default or get seriously marked down in the past year and a half. In April 2006 bonds issued by the West Virginia Economic Development Authority, funding a resort and conference center, defaulted due to flagging government support for the private-activity bonds. Also, in June of that year, unrated bonds issued to finance an assisted-living facility in Tarrant County, Texas, were marked down after declining occupancy rates put the viability of that project into question. Finally, this year bonds issued by a Tulsa County, Okla., multifamily housing authority were marked down, due to weather-related construction delays and poor occupancy rates. The fund recently filed a statement that revealed that portfolio assets exceeded its 15% limit on illiquid securities. Management will avoid putting more money in such securities and will seek to reduce its stake. With a year-to-date loss of 0.96%, the fund ranks last among its peers in a category that, to date, has been the best-performing in the muni markets.

Manager Change at American Century Growth Offering
American Century Investment Management, which has seen significant turnover among its executive ranks, portfolio managers, and analysts, just announced another change: U.S. growth CIO Steve Lurito will replace Wade Slome on  American Century Ultra (TWCUX). This move was made a bit over a year after longtime lead manager Bruce Wimberly and comanager Jerry Sullivan left the fund. At that time, however, Tom Telford came on board to manage the fund day to day, and he remains here. We hope this offering will see management stability going forward.