The Hartford Fined $115M In Rigging, Timing Case

The Hartford Financial Services Group reached a $115 million settlement with regulators in Connecticut, New York and Illinois over charges it conspired with March & McLennan to submit inflated bids on property and casualty insurance, paid hidden fees to brokers and permitted some investors to market time mutual fund sub-accounts in its variable annuities.

Although the firm didn't admit to or deny the allegations, it issued an apology to investors and stated it has "enacted business reform to ensure that this conduct does not occur again."

The Hartford also announced that the Securities and Exchange Commission has concluded its own investigation into market timing and will not be taking any enforcement action against the company.

Bogle Exhorts Boards to Maintain Fee Monitoring

Vanguard founder John C. Bogle blasted American Enterprise Institute Scholar Peter Wallison's claims that market forces keep mutual fund fees in check, in an editorial in The Wall Street Journal.

"It's hard to imagine that Peter Wallison is serious," Bogle wrote, of Wallison's contention that directors need not be concerned with setting fees for investors. Wallison compared boards to local utility commissions. Such commissions stifle free market forces, he said.

Bogle countered: "It flies in the face of common sense." Fund boards don't set fees; they approve structures set by the advisors, Bogle said. Bogle points to Fidelity, where the directors oversee 668 specific mutual funds. Bogle argues that Fidelity makes a handsome profit on most of those funds, while losing on a few, but the fees reflect a relatively consistent average, he said.

American Funds has held its rates at about 1% of assets under management for decades, Bogle noted. But as the firms' assets have swelled, from $282,000 in 1958 to $70 billion today, so do its profits.

The Investment Company Act of 1940 demands that mutual funds keep the best interest of the investor at heart, he said.

"Eliminating fee-monitoring authority of the fund board would belie that sound public policy," he said.

The real way to bring competition is to put the power in the hands of shareholders, Bogle said. That means more independent directors, an independent chairman and a small staff to support them. Each of these is a proposal before the Securities and Exchange Commission.

"To step back from these reforms is to continue to empower the advisor fox to watch the mutual fund henhouse," Bogle wrote.

Some Foresee End to Emerging Markets' Growth

White-hot mutual funds always reach the end of the road, and this could be true for emerging market funds, Investor's Business Daily reports. Even investors' interest in these funds is beginning to dissipate.

Whereas emerging market funds took in $6.5 billion in the first half of 2006, they've only netted $696.4 million in the first six months of this year.

Certainly, they are still delivering stellar returns. Year-to-date through July 11, they are up an average of 23.97%, 39.53% for the past three years and 30.05% for the past five years, according to Morningstar. But this cannot continue forever, said Adam Bold, executive chairman of The Mutual Fund Store.

"I think the risk/reward ratio is out of whack. I'm willing to miss the last 15% to the upside in exchange for avoiding a 50% loss," said Bold, who stressed that the potential for the upside in China, India, Latin America and Eastern Europe has already been factored into their markets.

"I have lived through the collapse of the Mexican market in 1998 and the collapse of the Russian market in 2000," he said. "I've seen this movie a lot of times, and I don't like how it ends."

"Some of the valuations have gone up a lot, trading above historical ranges, so I think there will be corrections," agreed Steve Cao, portfolio manager of the $1.2 billion AIM Developing Markets Fund. However, he is more optimistic than Bold. "I think the current state of the emerging markets is much healthier and in better shape right now to weather the downturn-better than the down cycles that we've seen previously."

Barclays, State Street Plan Municipal Bond ETFs

Shortly after Barclays announced that it was filing with the Securities and Exchange Commission to offer the first-ever municipal bond exchange-traded fund, so did State Street Global Advisors.

The funds, which are still awaiting SEC approval, will likely appeal to higher-income investors looking for the tax advantages of municipal bonds, which are typically not subject to federal taxes. Thus, municipal bonds frequently deliver higher after-tax returns than corporate or treasury bonds.

"This potentially will have a very attractive yield compared to most municipal bond mutual funds," financial adviser Marvin Appel told the New York Daily News. He believes the funds will probably charge fees of 20 basis points, compared to the average 64 basis points on municipal bond mutual funds.

"In the muni bond world, just a few percentage points can separate the winners from the losers, so costs are of paramount importance," said Sonya Morris, editor of Morningstar ETFInvestor.

Vanguard Launches ETF Focused on MSCI EAFE

A new Vanguard exchange-traded fund, the Vanguard Europe Pacific ETF, began trading on the American Stock Exchange. With 1,134 holdings, it is the most broadly diversified ETF on the market, Vanguard said, and with an expense ratio of 15 basis points, it is the lowest-cost ETF tracking the MSCI EAFE Index. The index has holdings in companies in 21 countries. The new offering is a share class of the $2.3 billion Vanguard Tax-Managed International Fund.

"Vanguard has long been recognized as a low-cost leader among mutual fund investors, and we're bringing that same cost advantage to ETF investors," said Vanguard Chief Investment Officer Gus Sauter.

Cash flows to the firm's ETFs have risen 40% this year, and assets have doubled over the past year to $31 billion, which Vanguard attributes to its average ETF expense ratio of 18 basis points, compared to the industry average of 41 basis points.

HealthShares ETF Options Trade on Philly Exchange

Investors can now buy options on the HealthShares Emerging Cancer exchange-traded fund through the Philadelphia Stock Exchange electronic trading platform.

HealthShares is a series of ETFs sponsored by New York-based XShares Advisors that track 20 segment areas of the healthcare industry. The ETFs, which launched in January, trade on the New York Stock Exchange.

"HealthShares exchange-traded funds represent an opportunity for portfolio managers to gain exposure to the fast-growing global healthcare industry," said Daniel Carrigan, president of new products at the Philadelphia exchange.

Chinese Stock-Index ETFs Trading in Hong Kong

China is getting ready to introduce its first all-mainland stock index and an exchange-traded fund to track it, according to Shanghai Daily.

Following China Securities Index Co.'s introduction of the CSI 300, an index of the 300 largest mainland "blue-chip" companies, BOC International and Prudential Asset Management jointly introduced an ETF in Hong Kong based on the index.

Chinese authorities are expecting to launch stock-index-based futures contracts this year, despite several recent setbacks.

Mainland China now has 19 index funds. As of June, that represented a $16.3 billion market.

Investment Firms Launch Synthetic' Hedge Funds

A number of asset management firms, including Merrill Lynch, Goldman Sachs and JPMorgan, have created a new type of product called hedge fund "clones," or "synthetic" hedge funds, which employ hedge fund strategies without charging the typically high fees or imposing long lock-in periods or high investment minimums, The Wall Street Journal reports. Some are tied to hedge fund indexes, while others use more complex strategies.

Such funds are "a natural evolution in the market," said Paul Brakke of State Street Global Advisors.

But skeptics say the products are too complicated and, potentially, very risky. They also point out that these products don't have track records.

Two of the oldest, from Rydex Investments, were only launched two years ago. They returned 6.6% and 8.4% last year, considerably lower than the often cited hedge fund benchmark HFRA Fund Weighted Composite Index, which rose 12.9%.

Even William Fung, a finance professor at the London Business School who is working with both State Street and JPMorgan on developing such products, had harsh words. "The jury is out, and there's not enough evidence to convince me these [current] models are capturing the dynamics of the [hedge fund] industry," Fung said.

Waddell & Reed Returns To Profitability in 2Q07

Waddell & Reed reported that it returned to profitability in the second quarter, earning $29.7 million, or 36 cents per share. In the second quarter of 2006, the company lost $33 million, or 40 cents per share. This year's second-quarter profits fell a penny short of the 37 cents a share consensus. Total assets under management rose 20% to $54 billion, up from $45 billion a year ago.

Legg Mason Earnings Rise 22 Percent to $191 Million

Legg Mason reported a healthy 22% increase in its profits in the first fiscal quarter, ended June 30, to $191 million, or $1.32 a share, up from $156 million, or $1.08 a share, in the first fiscal quarter a year ago. Those earnings were on a 16% rise in revenue, to a record $1.21 billion, and beat Wall Street estimates of $1.24 a share.

But although total assets under management rose 16% to $992 billion, upon hearing the news that the company suffered $7 billion in net outflows from its stock funds, primarily due to disappointing returns, its share price fell 3.5% in early trading.

Commenting on public reaction to legendary fund manager Bill Miller losing his 15-year winning streak of beating the S&P 500 last year, Legg Mason Chairman and CEO Raymond "Chip" Wilson once again reiterated that Miller's record is exemplary, and that it is inevitable that he will have some off years.

DST Profits Increase 31% To $72.8 Million in 2Q07

DST Systems announced its second-quarter earnings rose 31% to $72.8 million, or $1.01 a share, from $55.5 million, or 76 cents a share, in the second quarter of 2006. Adjusted earnings rose to $58.7 million, or 81 cents per share, from $51.6 million, or 70 cents per share.

The company attributed the strong growth to higher license fees and an increase in the number of mutual fund accounts served.

Revenue fell slightly to $567 million from $570 million last year.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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