On the brink of closing the five no-load, fixed-income funds it oversees, the board of directors of the Fundamental Funds named Cornerstone Equity Advisors, a two-year old investment advisory firm, to assume management of the funds.
Fundamental's board of directors approved the new management on September 25 and Cornerstone took control on September 30. The fund has $162 million in assets. Cornerstone currently manages $20 million in equity assets for separate accounts, predominantly in small- and mid-cap markets. But the firm's leaders had previously invested exclusively in the fixed-income and municipal bond markets. This is the first time Cornerstone will manage a mutual fund.
The appointment of Cornerstone to manage the Fundamental Funds follows the ouster of Tocqueville Asset Management, after a brief period as the funds' advsiers. Tocqueville had served since June as the Fundamental funds' interim acting adviser. Tocqueville originally agreed to become the funds' foster parent when, in a rare display of corporate activism, Fundamental's independent trustees gave the management company a no confidence vote and took the funds' management contract away from its parent, Financial Portfolio Advisors. That move was precipitated, at least in part, by the SEC's filing of administrative proceedings against two Fundamental principals one year ago. The SEC alleged that the principals knowingly marketed and advertised one of the funds as a "safe" investment, even though the portfolio held many highly volatile, interest-rate sensitive derivative securities.
The SEC action came just months after Fundamental's principals had been sanctioned by the National Association of Securities Dealers Regulation (NASDR). At that time the fund group's distribution arm had been dismantled as part of the settlement with the NASDR.
But relations between the Fundamental trustees and Tocqueville quickly soured. One source of conflict was the degree to which market timers would be tolerated. Under Fundamental's leadership, market timers were welcomed. But Tocqueville wanted to restrict hot money flows in order to reduce large expense ratios. These had become inflated in part because of the fund group's mounting legal bills.
As the funds' new advisers, Cornerstone will make improving performance and reducing expenses its top goals, says Stephen Leslie, president and lead portfolio manager of Cornerstone. Cornerstone hopes to strike a balance between the frequent trading of a large contingent of market timers and the rest of the shareholder base, he said. He also is considering adding a fourth manager to its portfolio management team or designating a single manager for each fund. The management team now includes Leslie and his partners Harry Petersen and James Dematte. Either way, Cornerstone will be reducing the funds' investment in derivatives and other exotic securities, says Leslie. He also plans to improve both the credit quality and liquidity of the fixed-income portions of the funds.
The new advisers are also likely to change the funds' names to include "Cornerstone." Though the Fundamental name is tarnished, many people know the Fundamental New York Tax Exempt Fund's strong history. It was the first triple tax-free fund offered in New York, said Leslie.