Influential mutual fund tracker Morningstar has upgraded its perspective on Bank of America's scandal-plagued Columbia Funds, which after a 2004 merger with FleetBoston now includes the equally troubled Nations Funds.
On the heels of a recent settlement with the Securities and Exchange Commission and a site inspection by the Chicago-based investment researcher, Morningstar has lifted its "don't send new money" recommendation on Columbia Funds. But as Russel Kinnel, director of fund research at Morningstar, added, "that doesn't mean we're giving the shop a ringing endorsement."
Kinnel said Morningstar still has reservations about Columbia Funds because of the poor track record of managing previous fund mergers at its legacy firms. For example, Kinnel indicated in an April 5 report, Columbia's Liberty Funds unit "has in the past left funds in limbo1/4sometimes taking months or years to figure out what strategy the funds would be run in and who would manage them. That's a nightmare for fundholders trying to build a portfolio or assess if they should remain in a fund." Columbia manages about $331 billion in assets across 120 funds. It plans to consolidate down to 75 funds by the end of 2006.
And while Columbia's most recent round of consolidation has delivered on two key elements of any successful fund merger--lower expenses and better management at the surviving fund--Morningstar questions the shop's decision to merge a regional fund, Columbia Newport Tiger, into a diversified foreign fund. Morningstar agrees with the rationale, but is curious why Columbia's China fund isn't included on the slate of funds to be merged away.
That factor notwithstanding, Kinnel said that Bank of America's $675 million settlement for rampant market-timing and late-trading abuses at the Columbia and Nations funds, as well as vastly improved compliance and the dismissal of wrongdoers, has put Morningstar's greatest concerns to rest.
"[Columbia] is now a more coherent organization with clear compliance reporting lines and monitoring," Russel reported.
Areas of particular improvement Kinnel noted include new compliance officers who report regularly to independent directors and management; new sales agreements that now require sign-off from senior management and legal staff; and an effort for accurately determining which fund companies are trading within its omnibus accounts is nearly complete.