Schwab YieldPlus Goes From Hero to Zero
Schwab also cuts fund fees; two prominent managers get set to launch a fund.
Fund Times
Schwab plans to liquidate Schwab YieldPlus as part of an ongoing effort to clean up its fixed-income lineup.
YieldPlus, once the largest fund in the ultrashort-bond category, will liquidate before the end of August. In mid-2007, the fund had more than $12 billion in assets and had been a top performer for several consecutive years. At the time, Schwab touted the fund as a higher-yielding alternative to cash.
Prior to 2007, YieldPlus delivered high returns because it was taking greater risks than was its typical peer. In late 2007, the nonagency-mortgage and asset-backed sectors began to suffer, and the fund's large stakes there caused its value to drop. In the following two years, heavy shareholder redemptions and declining market values eventually led to a 47% loss in April 2009 from the fund's July 2007 peak. Its assets have since dwindled to $141 million, and it has been the focus of several lawsuits alleging Schwab provided inadequate disclosure of the fund's risks.
Schwab has since spent hundreds of millions of dollars settling federal and state claims related to YieldPlus, along with charges filed by the Securities and Exchange Commission. Schwab will also liquidate Schwab Tax-Free YieldPlus and Schwab California Tax-Free YieldPlus , which also suffered from substantial investor outflows following performance blowups.
Since the YieldPlus debacle, Schwab has redoubled its efforts to tighten up and better abide by prospectus mandates. For example, Short-Term Bond Market and Schwab Total Bond Market were initially billed as bond index funds but held large stakes in nonindex securities such as nonagency mortgages. In 2008, Short-Term Bond Market trailed its benchmark, the Barclays Capital Government/Credit 1-5 Year Index, by 10.6 percentage points, and Total Bond Market lagged its benchmark, the Barclays Capital U.S. Aggregate Bond Index, by 9.7 percentage points. As of the Feb. 28, 2011 semiannual report, the managers had positioned the funds more in line with their respective benchmarks, and neither fund held any nonagency mortgages.
Meanwhile, Schwab Inflation Protected's (SWRSX) name will change to Schwab Treasury Inflation Protected Securities. The fund's mandate will be to invest at least 80% of assets in Treasury Inflation-Protected Securities. It previously could hold 80% of assets in a variety of inflation-protected fixed-income securities, including those issued by corporations and foreign governments.
The funds are becoming much cheaper for investors, as well. Schwab said it will cut the expense ratio for Schwab Treasury Inflation Protected Securities to 0.29% from 0.50%. Fees on Schwab Short-Term Bond Market and Schwab Total Bond Market will drop to 0.29% from 0.55%. While the fee cuts are a shareholder-friendly decision, it remains to be seen how well the fixed-income team can manage these funds going forward.
Romick and Gundlach to Team Up in New Alternative Fund
For the first time, two Morningstar Manager of the Decade nominees will team up to run a new fund. Steven Romick of FPA and Jeffrey Gundlach of Doubleline will join a team from Loomis Sayles and Water Island Capital to run the Litman Gregory Masters Alternative Strategies Fund.
According to the filing, FPA's sleeve will be managed with the intent of replicating a private hedge fund run by Romick's team. The exact strategy of the hedge fund was not disclosed, though the filing indicates it will be similar to FPA Crescent's (FPACX) strategy. Meanwhile, Gundlach's portion of the fund will be run like his "Opportunistic Income" sleeve in the newly launched RiverNorth DoubleLine Strategic Income (RNSIX).
The Loomis Sayles absolute-return sleeve will be modeled after Loomis Sayles Absolute Strategies (LABAX) and the team's allocation to the soon-to-be-launched American Beacon Absolute Strategies.
Water Island Capital, advisor to Arbitrage Fund (ARBNX), will run the merger-arbitrage sleeve of the fund. That portion of the fund seeks to generate long-term returns of at least mid-single digits with low correlation to the equity and bond markets.
Given the different strategies employed by each management team, the sleeves are expected to have very little holdings overlap and correlations.
In a first for a Litman/Gregory advised mutual fund, the assets will be tactically allocated based on the risk/reward prospects of each strategy at the time. All of Litman/Gregory's previous funds run under the Master's Select label have given each manager a static allocation.
Fees for the Investor share class, which carries a $1,000 investment minimum, are expected to be 1.74% per year after waivers, according to the filing. This is higher than any of the mangers' charges in their standalone strategies. However, if the fund were to land in Morningstar's multi-alternative fund category, it will be lower than that group's 2.06% average expense ratio.
Davis, American, and BlackRock Funds Get Burned by Sino-Forest
Several prominent mutual funds known for their intensive fundamental research have gotten a black eye from their investment in forest plantation manager Sino-Forest . The company has lost 86% of its value in the year to date through June 21. The company is under fire by a hedge fund that is alleging the firm is overstating its forestry plantation holdings in the People's Republic of China.
As of March 31, 2011, Davis New York Venture (NYVTX), advised by Davis Selected Advisers, owned approximately 8% of Sino-Forest (accounting for 1.3% of the fund's assets). The fund first disclosed its position in Sino-Forest during the first quarter of 2008. BlackRock Global Allocation , managed by Dennis Stattman, had a 1% stake in the firm (0.13% of assets). American Funds Growth Fund of America (AGTHX) and the hedge funds run by famed investor John Paulson also had stakes.
Paulson recently disclosed he sold all of his holdings for a loss while Davis, BlackRock, and American haven't disclosed whether or not their funds still own shares. Below is a list of the mutual funds with the 10 largest pieces of Sino-Forest.
Date Portfolio Weighting % Position Market Value % Market Value Shares Davis NY Venture (NYVTX) 1/31/2011 1.33 445,977,968 8.34 20,504,34 Ivy Glb Nat Resources (IGNAX) 3/31/2011 3.23 284,983,167 4.46 10,920,600 AmerFunds GrwthFundofAm (AGTHX) 3/31/2011 0.17 258,349,665 4.05 9,900,000 Hartford Cap Appreciation (ITHAX) 3/31/2011 0.76 156,575,554 2.45 6,000,000 Selected American Shares (SLADX) 3/31/2011 1.57 119,692,356 1.88 4,586,630 Old Westbury Real Ret 1/31/2011 3.23 78,302,292 1.47 3,600,000 BlackRock Glb Allocation (MALOX) 1/31/2011 0.13 58,257,608 1.09 2,675,490 Metropolitan Ser Dav Vent Value 3/31/2011 1.54 65,376,470 1.02 2,511,180 Henderson Intl Opps 3/31/2011 1.36 48,277,463 0.76 1,850,000 Hartford Cap Appreciation HLS 3/31/2011 0.42 43,268,611 0.68 1,658,060
Fidelity Loses a Target-Date Fund Manager
Jonathan Shelon, a comanager on the Fidelity Freedom Funds target-date offering since 2007, is leaving Fidelity. Fidelity, which runs both an actively managed and index-based target-date series, is the largest target-date fund manager. The firm manages more than $100 billion in its actively managed Fidelity Freedom Funds.
Andrew Dierdorf, a portfolio manager in Fidelity's global asset allocation group, will take Shelon's place. Dierdorf joined Fidelity in 2004 and will continue to comanage Fidelity's 529 college-savings plans and other funds previously under his charge.
There will be no changes with any of the funds' investment strategies associated with the change in management.
Etc.
Morgan Keegan is paying $200 million to settle charges of fraud brought by the SEC related to the firm's pricing of mortgage securities. Following the settlement, parent Regions Financial (RF) announced it intends to sell the unit.
The U.S. House of Representatives will hold a hearing on June 24, 2011, titled Oversight of the Mutual Fund Industry: Ensuring Market Stability and Investor Confidence. Former SEC official Andrew "Buddy" Donahue will testify, as will representatives from Vanguard, Fidelity, and the mutual fund industry's trade group, the Investment Company Institute.
Invesco announced that senior portfolio manager Barrett Sides is leaving the firm effective Aug. 31, 2011. He is a portfolio manager on multiple funds, including Invesco Global Growth and International Growth (AIIEX). Sides had been with Invesco for 21 years and is retiring from the investment-management business. Invesco will not replace Sides and none of the fund's investment strategies will change as a result of his departure.
Fidelity agreed to settle a class-action lawsuit related to its Ultra-Short Bond . The $7.5 million settlement will end the lawsuit, which alleged the fund was misrepresented as a money market alternative. In 2007, Fidelity overhauled the management team after the fund suffered steep losses.
Vanguard recently reported in How America Saves that in 2010, the median ($26,926) and average ($79,077) balances in defined-contribution accounts--such as 401(k)s--reached their highest levels since the firm began tracking the data in 1999. The company also reported that the availability and use of target-date funds continued to increase.
Western Asset recently launched Western Asset Short-Term Yield. The fund is expected to limits its duration (a measure of interest-rate sensitivity) to less than one year and will invest only in highly rated investment-grade bonds. The fund will only be available to institutional investors and will carry a $1 million investment minimum.
Goldman Sachs Asset Management announced it will introduce fee waivers for the Service and Institutional share classes of six of its funds. The move will temporarily cut fees by 10 to 35 basis points. Fees for the service share classes of these funds are currently above average or high relative to similarly distributed funds, and these share classes haven't attracted as many assets as Goldman's other channels. Two of the larger funds on that list are Goldman Sachs Growth Opportunities (GGOSX) and Goldman Sachs Mid Cap Value (GSMSX). Fees for Growth Opportunities will go from 1.47% to 1.15% and fees for Mid Cap Value will go from 1.26% to 1.09%. The waivers will go into effect July 1, 2011, and are set to expire April 29, 2012.
The Sentinel fund board is firing Steinberg Asset Management as the subadvisor of Sentinel Mid Cap Value , and replacing it with Crow Point Partners in August. Crow Point is an independent value shop run by some former Evergreen people, and it subadvises some portfolios for Wells Fargo. This fund used to be called Synovus Mid Cap Value, and Sentinel inherited the subadvisory agreement with Steinberg when it bought Synovus a few years ago.
MassMutual is changing the name of its target-date series from Destination Retirement to RetireSMART. At the same time, the firm is lowering the total expense ratios on the funds from 6 to 13 basis points annually. It's achieving the cost savings by switching the share class of underlying funds to newer, less expensive Z shares when available.
PNC Small Cap Core will change its name to PNC Small Cap on July 1, 2011.
Ruxiang Qian is no longer a comanager of TIAA-CREF Enhanced Large-Cap Growth Index , and Ping Wang is off the portfolio-management team of TIAA-CREF Enhanced International Equity Index .
Pending shareholder approval, Virtus Intermediate Tax-Exempt Bond will merge into Virtus Tax-Exempt Bond (HXBZX).
Jeffrey Peck is off the portfolio-management team of Wells Fargo Advantage Intrinsic Small Cap Value .
Pending shareholder approval, Calvert Large Cap Growth will merge into Calvert Equity (CSIEX). The current fees of the surviving fund are slightly lower. As of the beginning of May 2011, both funds have been run by the same portfolio managers.
Mutual fund analysts Karin Anderson, Kathryn Young, and David Falkof contributed to this report.