Fund Times: Outflows Continue at Fairholme
Vanguard and Neuberger launch funds in hot categories while California's 529 plan gets a new manager.
Fairholme Fund (FAIRX), managed by Morningstar Domestic-Stock Manager of the Decade Bruce Berkowitz, continues to suffer outflows. The fund shed $1.2 billion in estimated outflows in May after experiencing outflows of an estimated $1 billion in April.
This marks the fund's third consecutive month of outflows and brings the three-month total to an estimated $2.5 billion. With the fund down nearly 8% for the year to date through May, total assets have dropped to about $16 billion as of May from about $20 billion in February.
After three months of net redemptions, Berkowitz said during an interview with Bloomberg Television at the 2011 Morningstar Investment Conference that the fund now holds roughly 5% of its assets in cash, which would imply about $800 million in cash holdings. This is a dramatic shift. As of Feb. 28, the fund had about 25% of its then $20 billion portfolio in cash.
In an interview with Morningstar analysts this week, Berkowitz said that while he takes a cautious approach to managing liquidity and maintaining a cash buffer, he is also comfortable keeping cash below 10% for an extended period of time. This comfort with a lower cash level stems from his strong conviction in the fund's top holdings. In fact, Berkowitz also told Bloomberg that Fairholme boosted its stake in its largest holding, AIG (AIG), by participating in the U.S. government's partial sale of its AIG stake in May. Of course, holding less cash also means that the fund's equity portfolio now represents a larger, more-concentrated share of assets than at the time of the fund's last regulatory filing in February.
In his recent analysis of the fund, Morningstar editorial director Kevin McDevitt reminded new investors in Fairholme, which remains a Morningstar Fund Analyst Pick, that "this fund requires far more conviction and patience than most."
TIAA-CREF Wins California 529 Contract
TIAA-CREF won the right to manage the more than $4 billion in assets in California's direct-sold 529 college-savings plan.
The investment manager will take over for Fidelity in November and the new plan will offer lower fees. However, Morningstar analysts view several of TIAA-CREF's funds as middling versus peers.
The state chose TIAA-CREFF over Union Bank and Trust Company of Lincoln, Neb., based on a rating scale and decided that the shop offered a better distribution plan, according to a report by the ScholarShare Investment Board, which oversees California's 529 plans.
Most customers won't notice a difference in their funds, said Joe DeAnda, a spokesman for Bill Lockyer, California's State Treasurer and chairman of the ScholarShare board.
The board also oversees an advisor-sold plan, which Fidelity has been also managing. Nobody bid to take over the plan, which has about $300 million in assets. The advisor plan is more expensive to run and, because it has so few assets, financial-management firms didn't think they could earn enough to manage it, DeAnda said.
The state does not offer tax breaks for 529 investors, which makes it more difficult for firms to drum up business for the pricier advisor-sold plans, DeAnda said. The treasurer's office has lobbied for tax incentives, but with the state's current budget woes, "it's just not feasible," DeAnda said.
Amid an absence of bidders, the board plans on approaching TIAA-CREF as well other firms to take over the fund, he said.
Vanguard Opens Actively Managed Emerging-Markets Fund
Vanguard began accepting investments this week for its new actively managed emerging-markets fund, Vanguard Emerging Markets Select Stock.
The subscription period is scheduled to close at end of business on June 27, 2011. The money will be divided equally among the four subadvisors: M&G Investment Management, Oaktree Capital Management, Pzena Investment Management, and Wellington Management Company. These advisors have excellent track records but lack experience investing in emerging markets.
Vanguard already runs one of the largest emerging-markets funds, the passively managed Vanguard Emerging Markets Stock Index (VEIEX), with $62 billion in assets and an expense ratio of 0.35%. Though Vanguard's new fund will charge nearly 1%, that's still low compared with other emerging-markets funds.
Neuberger Berman Launches Global-Allocation Fund
Neuberger Berman joined the crowd this week by launching a global-allocation fund named Neuberger Berman Global Allocation (NGLXC).
Global-allocation funds are hot right now as investors seek funds that give managers wide latitude to switch investment tactics as the market changes. In the past year, 36 global-allocation funds have been launched.
The Neuberger fund uses a proprietary quantitative model to invest in several asset classes, including equities, currency, and debt, according to the prospectus. The fund will be heavily invested in derivatives and will also go long and short in equities and exchange-traded funds. Wai Lee, the chief investment officer of the Neuberger Berman's quantitative investment group and others will comanage the fund.
AllianceBernstein Closes Dog of a Fund
AllianceBernstein is liquidating AllianceBernstein Global Growth (ABZBX). It's no surprise, given the fund's terrible performance of late. Like many of the firm's funds, it did poorly during the downturn.
John Pickler is no longer a manager on Old Mutual TS&W Mid-Cap Value (OTMAX). The fund is now managed by Brett Hawkins.
John Hancock Classic Value Mega Cap (JMEAX) will liquidate on Aug. 19, 2011.
AllianceBernstein no longer subadvises Nationwide International Value (NWVAX), and will be replaced by UBS Global Asset Management on July 18, 2011.
William Cunningham no longer manages SSgA Bond Market (SSBMX), SSgA Intermediate (SSINX), and SSgA High Yield Bond (SSHYX). SSgA Bond Market and SSgA Intermediate are now managed by Matthew Pappas. SSgA High Yield Bond is now managed by Jeffrey Megar.
Legg Mason filed to launch Legg Mason BW Classic Large Cap Value on Sept. 1, 2011. The fund will be subadvised by Brandywine Global Investment Management and managed by Patrick Kaser and James Clarke. The fund will mainly invest in large-cap stocks. A shares of the fund will cost 1.30%.
The MassMutual Select Destination Retirement series changed its name to MassMutual RetireSMART.
Kevin McDevitt, Ryan Leggio, David Kathman, Katie Rushkewicz, and Kailin Liu contributed to this report.
Susan Daker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.