Fund Times: Excessive Fee Case Against RiverSource Makes Headway
Plus, American axes B shares, and more.
News that RiverSource was laying off multiple employees was not the worst news for the fund family this week. On Wednesday, the Eighth Circuit Court of Appeals said the shareholders of 11 RiverSource funds (including RiverSource Large Cap Equity (ALEAX), RiverSource Mid Cap Value (AMVAX), and RiverSource Mid Cap Growth (INVPX)) could sue the fund family's advisor in a lower court for charging excessive fees.
RiverSource fund owners had sued RiverSource funds' advisor, Ameriprise Financial (AMP), for breaching its fiduciary duty by charging higher fees on mutual funds than they did for similar institutional accounts. The suit initially lost in federal district court, but the appellate court's ruling to reverse that lower court's decision gives the suit another shot.
The argument is similar to one at the center of a lawsuit against Oakmark Funds advisor Harris Associates that is headed to the U.S. Supreme Court. (See this earlier story for details.)
In its case, Ameriprise defended its fees by contending an advisor cannot be liable for a breach of fiduciary duty as long as its fees are roughly in line with industry norms. This has been the fund industry's common defense against excessive fee lawsuits in past years and one that the district court accepted. The appeals court, however, wrote that the district court "erred in rejecting a comparison between the fees charged to Ameriprise's institutional clients and its mutual fund clients."
"Indeed, the argument for comparing mutual fund advisory fees with the fees charged to institutional accounts is particularly strong in this case because the investment advice may have been essentially the same for both accounts," the appeals court wrote.
Moreover, the appeals court wrote in its opinion that there was evidence Ameriprise was well aware the fee discrepancies between its retail and institutional accounts could be questionable.
"At some point during the [mutual fund] fee negotiation, the [RiverSource] Board became aware of the comparatively lower fees Ameriprise charged its institutional clients and requested a report explaining the similarities and differences between the two types of accounts," the appeals judges wrote. "Even before the Board's request, there is some indication that Ameriprise knew that a fee discrepancy between institutional accounts and mutual funds might concern the Board. In response to a Wall Street Journal article that discussed the industry-wide disparity in fees, an internal email noted that 'this could come up in a Board meeting' and suggested that 'we should have a reply, though it may or may not be convincing.'"
It's likely that the district court will put the RiverSource case on hold until the Supreme Court rules on the Harris Associates case sometime early next year. We will be following both cases closely and will let readers know of any new developments.
IShares Deal Reached
Today, Barclays (BCS) announced that it had reached an agreement with CVC Capital Partners to sell its iShares business to a newly formed limited partnership, Blue Sparkle, for $4.4 billion. According to Morningstar analyst Erin Davis, the terms are not final. Barclays has 45 days from April 15 to shop around for a better price.
My colleague Scott Burns, Morningstar's director of ETF analysis, thinks the sale of iShares will have no effect on shareholders of its ETFs.
Third Avenue Sues MBIA
Legendary value investor Martin Whitman's Third Avenue Management LLC., the advisor to Third Avenue Value (TAVFX), has filed lawsuits against units of MBIA Inc. (MBI) saying the bond insurer's decision to separate its businesses "greatly harmed" Third Avenue as a bondholder. According to the lawsuit, Third Avenue is asking the court to order MBIA to either undo the split or provide better protections for investors like Third Avenue who bought new debt MBIA issued when it needed emergency capital.
Third Avenue Value owned more than $190 million in MBIA-related bonds as of Oct. 31, 2008. The fund is also the largest mutual fund holder of MBIA equity; it owns 7% of the shares outstanding, and its stake was worth close to $100 million as of April 9.
Wall Street Journal reported news of the lawsuit earlier this week. In an interview with the Journal, Whitman said he felt betrayed by MBIA, which didn't inform him about the restructuring until after it was complete.
Longtime Manager Out at Dreman High Return Equity
David Dreman and his firm Dreman Value Management from DWS Dreman High Return Equity (KDHAX) were relieved of duties as of June 1, 2009. Dreman and company will be replaced by a team from DWS' office in Frankfurt, Germany, led by Volker Dosch, Oliver Pfeil, and Thomas Schuessler, and the fund will be renamed DWS Strategic Value. Schuessler has managed DWS Large Cap Value (KDCAX) since February 2007.
For more, see this article.
New Manager at Fidelity Mega Cap Stock
Fidelity has named Matthew Fruhan as the new manager of Fidelity Mega Cap Stock (FGRTX) as of April 1, 2009. He replaces Richard Mace who has been the manager since 2007. There has been a significant amount of manager upheaval here since 2005 and the fund's performance has been mediocre.
American Funds to Ax B Shares
American Funds announced earlier this week that it will stop selling B shares for its funds after April 21. B shares usually charge deferred loads, meaning investors don't pay sales charges until after they sell the fund. B shares, however, often levy higher expense ratios than share classes that require initial sales charges. B share classes usually aren't the best deal for shareholders, so we're happy to see them go at American Funds.
For more details on the announcement, see American Funds Fund Family Report editor John Coumarianos' report.
International Bond Funds Change Lineups
New comanagers Robert Robis and Sara Zervos are joining Oppenheimer International Bond (OIBAX) and will help current manager Art Steinmetz with the day-to-day operations. Steinmetz was recently named director of fixed income after many Oppenheimer bond funds suffered huge losses due to their aggressive use of off-balance-sheet derivatives and leverage.
Robis has been a vice president and global economist of the fixed-income team since July 2005. Zervos came from Sailfish Capital Management, where she was a portfolio manager from May 2007 to February 2008.
At PIMCO Emerging Markets Bond (PEMDX), manager Mike Gomez will move to PIMCO's Munich office to lead the firm's European emerging-markets fund effort. Co-head of the emerging-markets team Curtis Mewbourne will replace him. Gomez remains co-head of the emerging-markets team, so the U.S. fund shouldn't see significant strategy changes.
Evergreen Bond Funds to See New Management?
According to recent filings, multiple Evergreen bond funds may have a new advisor soon. Evergreen Investment Management Company, LLC, the Evergreen funds' investment advisor, expects to propose that Wells Capital Management Incorporated replace Tattersall Advisory Group, Inc. as subadvisor to Evergreen Core Plus Bond (EKDLX), Evergreen Core Bond (ESBAX), and Evergreen Short-Intermediate Bond (EFXAX). Wells Fargo (WFC) owns Evergreen.
This would occur either through the execution of a new subadvisory agreement and/or through the reorganization of each Evergreen fund into a similarly managed Wells Fargo Advantage fund. Any such changes are required to be approved by trustees and shareholders and would take effect sometime in 2009. We will provide additional information concerning these developments as it becomes available.
Ariel to Launch New Strategy
Ariel announced this week the appointment of David M. Maley as senior vice president and portfolio manager of the newly launched Ariel Micro-Cap Value strategy targeting companies under $500 million in market cap. If this separately managed account turns into a mutual fund, we will let readers know.
Editor's Note: Information in the International Bond Funds Change Lineups section has been corrected. Click here to view.
Ryan Leggio does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.