Hedge Fund Street

SEC Mandates Fund Compliance Officers at Each Company

CNN Money reports:

"Starting Oct. 5, the SEC for the first time is requiring that funds hire chief compliance officers. The person's job will be to ensure that a fund company follow the rules -- everything from those covering personal trading by portfolio managers and how funds spread their brokerage commissions, to the accuracy of reports to the SEC.

"To give teeth to this new watchdog, the chief compliance officer will report directly to fund directors, and not to executives of the fund-management company, who conceivably could profit from any wrongdoing." Read more

Snow: Bush Administration Supports Mutual Fund Industry Overhaul

Forbes reports:

"U.S. Treasury Secretary John Snow on Friday said the Bush administration supports overhaul of the troubled mutual fund industry but also pledged to work with it on possible reforms.

"'The Administration supports the (Securities and Exchange Commission) taking strong action when harm is done to investors, but believes that care must be taken to preserve the valuable benefits and flexibility that mutual funds provide,' Snow said in prepared remarks to the Financial Services Roundtable, an influential lobby group. [...]

"Snow noted the SEC was looking at late trading and market timing, mutual fund governance, conflicts of interest and fee disclosure."

Real Estate Mutual Funds Lead All Sectors

The ChicagoDaily Herald reports:

"After this year's tumultuous first quarter, most stock funds had given back any gains they'd made since Jan. 1, according to mutual fund watcher Lipper Inc. But real estate funds led all sectors with an average 11.9 percent return.

"Last year, the average real estate fund advanced 37 percent, beating the overall market." Read More

Meridian Value Fund Continues Strong Performance

Investors.com ran an article on the investing strategies of Jamie England and Richard Aster, the managers of one of the most successful mutual funds over the past few years:

"'What we look for are solid companies undergoing some sort of a short-term earnings setback.'

"And in the past 10 years, its 19.57% average annual return beat 99% of its mid-cap blend peers tracked by Morningstar Inc.

"'We're more focused on earnings than underlying asset values,' said 63-year-old Aster, who founded the fund in 1994 and serves as its lead manager." Read More

Janus CEO Mark Whiston Receives $3.4 Million Bonus

Despite stellar performance in 2003, some are wondering if the enormous bonus paid to Mr. Whiston is foolish, considering the company's role in recent mutual fund scandals.

The Motley Fool reports:

"In a regulatory filing last week, the Denver fund firm revealed that it paid its CEO, Mark Whiston, $3.4 million in stock as a bonus for his performance during 2003, his first year in the top job.

"Janus, along with Bank One and Bank of America, was accused of allowing big clients to rapidly trade their funds at the expense of gains that might have been realized by long-term investors.

"Of the six growth funds that company reports say are still open to investors, five beat the total return of the S&P 500." Read More

SEC Adopts New Mutual Fund Market Timing Disclosure Rules

According to Reuters:

"Starting Dec. 5, the Securities and Exchange Commission ordered funds to explain publicly their policies on timing and disclosure of portfolio holdings, as well as when and how they "fair value" pricing -- a way of updating share prices to fight market-timing abuses.

"The SEC aims 'to shine some light on what has proved to be a dark and dingy corner of the mutual fund industry,' SEC Chairman William Donaldson said in a commission meeting.

"The SEC's 5-0 vote in favor of the new disclosure rules came amid a broad push to crack down on problems among the country's many thousands of mutual funds, stewards of the investments of half of all U.S. households." Read more

State Street More Than Doubles in Last Year

According to Reuters:

"Boston-based State Street, which holds trillions of dollars in securities in custody and calculates the bulk of mutual fund prices that are printed in newspapers, reported first-quarter net income rose to $217 million, or 63 cents per diluted share, from $96 million, or 29 cents per diluted share, a year ago.

"Total revenue rose to $1.22 billion in the first quarter from $1.02 billion a year earlier." Read more

SEC to Force Market Timing Disclosures

From MLive:

"Federal regulators are moving to force mutual fund companies to clearly disclose to shareholders their policies and procedures for market timing, a practice at the heart of many of the cases that authorities have brought against funds in the industrywide scandal.

"The SEC's inspections of fund companies found that nearly 70 percent of the firms canvassed reported being aware of market-timing by their customers, while documents provided by some 30 percent of the firms 'indicated that they may have assisted market timers in some way,' SEC Chairman William Donaldson has said.

"Ordinary fund investors have lost billions of dollars from such special trading deals allowing favored customers and fund company insiders to benefit from frequent trades, regulators say." Read More

Jim Nesfield a Critical Informant in Mutual Fund Investigation

According to the Miami Herald:

"Jim Nesfield, 45, spent a decade mastering the inner workings of the industry's back office, where the behind-the-scenes clearing and settlement of trades occurs.

"Nesfield used his knowledge of trading systems to help a New Jersey hedge fund, Canary Capital Partners, make improper mutual fund transactions. Later, when a top deputy of New York Attorney General Eliot Spitzer called, he became a critical informant." Read more

How Much Do Investors Deserve to Know about Management?

Harold Evinsky, a certified financial planner and member of Alpha Group, submitted an 18-point questionnaire that surveyed procedures and safeguards to avoid illegal trading practices to 101 major mutual fund companies. Only 43 responded.

Humberto Cruz of the Salt Lake Tribune reports:

"I was surprised [at the low number of responses], considering Evensky is one of the best known financial advisers in the country and members of the Alpha Group collectively advise clients with portfolios in excess of $3 billion.

"The point is, all investors have a right to ask about fund governance and ethics, and trading and sales practices. I don't see why I should hand over my money to a company unwilling to discuss these issues." Read more

SEC Reconsiders 4 p.m. Hard Close

The SEC, after receiving nearly 1,100 formal comments that voiced concerns over the difficulties of adopting a hard close at 4 p.m., is reconsidering alternatives. The hard close would require that all fund trades be placed with the fund company, not just brokers, by 4 p.m. ET. This hard close, however, would actually require many trades to be completed by as early as 1 p.m. ET in order to fully process and get in the hands of the fund company by close. Investors on the West Coast would have to have trades submitted by 10 a.m. PT to have them processed in time.

The Chicago Tribune reports:

"[SEC Chariman William] Donaldson told senators the SEC 'is analyzing this information to determine whether there is an effective alternative to the hard 4 p.m. rule proposal that would not disadvantage certain investors and would not distort competition in the marketplace.'

"'It may very well turn out that we adopt a combination of some of the alternatives,' he said.

"Several members of the fund industry, including the leading trade group, the Investment Company Institute, and some SEC members have strongly supported the proposal." Read more

Putnam Investments to Pay $110 Million Settlement

According to the Associated Press:

"Putnam Investments will pay $110 million to settle federal and state allegations of improper trading in the case that launched the scandal over so-called market timing in the mutual fund industry.

"Under the settlements announced Thursday, half the money -- $5 million in ill-gotten gains and $50 million in penalties -- will go to investors to complete a settlement with the Securities and Exchange Commission that Putnam tolerated improper trades by fund advisers.

"Putnam also will pay $5 million in restitution and a $50 million fine to settle Massachusetts allegations that it failed to halt market timing by members of a labor union who had 401(k) retirement plans through the Boston-based company." Read more

Two Morgan Stanley Brokers Fired

The Wall Street Journal is reporting that two brokers at Morgan Stanley have been fired amid an investigation by the SEC involving illegal late trading.

According to the Baltimore Business Journal:

"Morgan Stanley dismissed H.W. 'Buddy' Buzzerd III, branch manager for Morgan Stanley's Pratt Street office, and broker Chris Glassman after the SEC began looking into market-timing by clients, the source said. Market-timing involves rapid trading, or 'in and out' trading, of mutual fund shares. Such trades can hurt results for long-term holders of the funds."

Villere Mutual Fund Ranks in Top 3% of Balanced Funds

The New Orleans Times-Picayune reports:

"St. Denis J. Villere & Co. has been around for more than 90 years and manages about $1.1 billion for its 500 clients.

"But lately the attention-grabber for this venerable New Orleans money management firm is its mutual fund, which is less than five years old but already has a record that outpaces its peers and the major indices. [...]

"The mutual fund, with a total annual return in the past three years of 8.53 percent, ranks in the top 3 percent of all balanced funds, according to Lipper Analytical Services." Read more

Ethically Screened Funds Commentary

Bloomberg columnist Chet Currier offers up his take on socially responsible funds, arguing that ethics-based investing does not necessarily lead to higher returns.

Bloomberg:

"I'm a long way from buying this good-corporate-citizens-give-superior-returns stuff. ...

"According to a simple check I ran the other day, the average 'socially responsible' or 'religiously responsible' mutual fund tracked by Bloomberg gained 1.6 percent a year in the five years through the first quarter of 2004. That compares with a 4.1 percent average annual return for all stock and bond mutual funds, and 3.7 percent for all stock funds." Read more

Bank of America Broker Indicted

On Monday, former Bank of America broker Theodore Sihpol was indicted on 40 counts of fraud, grand larceny, and falsifying business records. He allegedly was helping a hedge fund trade mutual funds illegally after the 4 p.m. ET deadline.

According to the Financial Times:

When former Bank of America broker Theodore Sihpol III is arraigned on April 21 on 40 counts of fraud, grand larceny and falsifying business records, his lawyer says he will plead not guilty.

Fighting the charges in court, rather than pleading guilty or settling charges as other individuals and companies implicated in the mutual fund scandal have, will create an arena for a debate on whether so-called late trading is a criminal activity. Read more

Wall Street Journal Report

The Wall Street Journal's special quarterly review of the mutual fund industry summarized changes being considered by Congress and the SEC in the wake of the industry's scandal.

The article analyzes five of the most frequently debated possible regulations by the SEC and/or Congress:
1) Requiring that fund board of directors have a chairman independent of the fund-management company.
2) Enforcing a mandatory 2% redemption fee which would be charged to investors who sell fund shares within five days of purchase.
3) Creating a hard 4 p.m. close so as to eliminate illegal after-hours trading.
4) Eliminating 12b-1 fees, which are deducted from fund assets to compensate those who sell and market funds.
5) Eliminating soft dollars or restrict their usage to buying research from brokerage firms, thereby forcing fund managers to pay for additional expenses out of their pockets rather than abusing fund assets.

Read more at MLive.com.

Some Advisers Think Mutual Funds Are Overrated

From Reuters:

"One well-known financial organization -- let's call it Stock Pickers Inc. for the purpose of this column -- recently warned investors against buying 'nearly all mutual funds' and suggested ditching those they have. Instead, Stock Pickers recommended its service, which provides advice on investing in individual stocks.

"Recent scandals have made the fund industry more vulnerable to such competitive assaults." Read more

Mutual Funds Power China Stock Rally

Forbes.com reports:

"China's equity market -- Asia's third-worst performer in 2003 -- is poised to rebound at least five percent in coming months on top of an 18 percent gain since the start of 2004, propelled by an unprecedented fund investment boom, analysts say." Read more

Beginnings

Welcome to our new blog about mutual funds. The working title is Fund Blog. Enjoy!