The board of directors of the First Funds has fired Investment Advisers of Minneapolis, Minn. as the co-investment adviser to the First Funds Capital Appreciation Portfolio, one of the nine proprietary mutual funds of the First Tennessee Bank of Memphis, Tenn., an affiliate of the First Tennessee Bank National Association. The disclosure was made in a proxy statement the fund filed with the SEC April 14.

The fund's board has recommended replacing IAI with Delaware Management Corp. of Philadelphia. If shareholders approve the change, IAI will no longer manage the equity fund as of May 31. A shareholder vote to approve the advisory change will take place at a shareholder meeting May 17.

First Tennessee Bank acts as the co-investment adviser for the First Funds family that includes two equity funds, three bond funds and four money market funds. First Tennessee has acted in a supervisory role, providing investment management evaluations to the board and monitoring the activity of IAI. A four-member IAI portfolio management team has been responsible for the day-to-day management of the $56 million equity fund. IAI has managed the fund since it was introduced in the fall of 1997. According to the proxy filing, the board voted to oust IAI at a meeting March 1, and notified IAI of its decision March 30.

The First Funds proxy statement does not disclose the reasons for the IAI firing. A spokesperson for the fund group declined to comment citing the pending shareholder vote. A source close to the decision said the fund's recent disappointing performance led to the adviser's dismissal. However, the fund's performance suffered only in the two weeks subsequent to the board's decision.

In the month ending April 19, the fund's institutional "I" class of shares lost 17.11 percent, according to Morningstar, the fund data company in Chicago. That poor performance was apparently due, at least in part, to the fund's large concentration in volatile technology stocks. As of Dec. 31, the fund had more than 48 percent of its portfolio invested in the technology sector, according to First Funds' website. But, since late February, the fund managers had been trimming the fund's technology holdings, according to the website.

The fund's I-shares have returned 13.72 percent year-to-date through April 25, ranking it 14th among its peer group of 223 funds, according to Morningstar. In the three months ending April 25, the First Fund Capital Appreciation Portfolio was in the top ten percent of its peer group.

A spokesperson for IAI declined to comment on the IAI firing.

The firing of IAI comes amid several challenges the fund group has recently faced. Besides seeing a large turnover of employees and the replacement of its top executives, the firm has been embroiled in one lawsuit since 1998 and recently settled another regarding its funds' investments in private placement securities. (MFMN 4/3/00)

The new sub-adviser, Delaware Management, has been building a sideline business - its primary business is managing its proprietary mutual funds - by securing sub-advisory agreements with large fund managers including Paine Webber of New York and Prudential Investments of Newark, N.J. In December, ABN AMRO of Amsterdam awarded Delaware the day-to-day advisory function for one of its U.S. mutual funds, a small-cap blend fund. Delaware now has more than $1.5 billion under management through sub-advisory contracts, said Tom Gariepy, a spokesperson at Delaware.

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