Steer Clear of Nations Funds
Actions investors can take in light of the Spitzer complaint.
Actions investors can take in light of the Spitzer complaint.
While the investigation into late trading and fund arbitrage continues, mutual fund investors face the challenge of figuring out what to do with their money now.
At this point four fund companies have been named in the complaint, but none has been formally charged by New York Attorney General Eliot Spitzer. However, investors are always in the position of acting on incomplete information. You have to pick stocks or funds based on the news, data, and facts that are currently available. So, it makes no sense to ignore the details of Spitzer’s complaint.
Our Position
Given the seriousness of the charges leveled against Bank of America (BAC), it's prudent for investors to avoid the firm's in-house Nations Funds. If true, Spitzer's charges against Nations Funds would indicate a serious breakdown of compliance and a culture that placed sales ahead of fund shareholders. Subadvised funds run by Marsico Asset Management (including Nations Marsico Focused Equities (NFEAX) and Nations Marsico Growth ) and by Brandes ( Nations International Value ) were not named in the complaint, so we'll take some more time to review the implications for these funds before weighing in on whether they should be avoided, too.
We'll also take a little more time to go over the evidence on Janus , Bank One , and Strong, also named in Spitzer's complaint. However, we are deeply concerned about these allegations and would like to see the firms implement systems to ensure that fundholders have been returned to their rightful place at the top of the priorities list. It seems that in all the cases Spitzer detailed, sales people were running roughshod over investment professionals, and we'd like to see them reined in. Indeed, the allegation that sales people were allowed to violate fund prospectuses is one of the most striking features of Spitzer’s complaint, and something we haven't seen in past scandals.
The problems reflect the difficulty industry executives face in serving stockholders and fundholders alike. A bear market has cut into fund company revenues and profit margins and some fund companies have pressed too hard to maintain their profit margins. Clearly, when companies breach fiduciary duties to fundholders, as has been alleged, they’ve stepped over the line in their attempts to sustain profits. If you think about the two sets of boards of directors, it’s easy to see why corporate profits get the upper hand. Company directors are dobermans and fund directors are lap dogs. Who would you rather disappoint?
What Should Investors Do?
Spitzer made it clear that other firms would likely be named in this inquiry, too, so this may prove to be a worrisome scandal even for investors who don't own funds from the above-mentioned firms. Should other firms indeed face allegations, the key will be to determine if they encouraged or willingly allowed some investors to profit at the expense of others. Many hedge funds and individual investors market time funds, and most fund shops go to great lengths to prevent the practice. A problem arises when fund shops allow or encourage timing by favored clients. That’s a clear-cut violation of their fiduciary duty.
Thus, it’s best to seek out firms that have shown they take their duty as stewards of shareholder capital seriously. If you look at an array of signs that firms are shareholder-oriented, you increase the odds that the firm will do right by you on many levels, though there are no guarantees that the firm won't pop up in the current probe.
Some things to seek out are:
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