Funds With Structured Products Turn to Fair Value

The just-released annual report of the Regions Morgan Keegan Select High Income Fund and the Regions Morgan Keegan Select Intermediate Bond Fund indicate that funds with subprime mortgage-backed securities and other structured products have turned overwhelmingly to fair value to price their holdings, The Wall Street Journal reports.

The first fund used fair value for 60% of its holdings, and the second, 50%. In so doing, the funds assessed the types of securities, the cost at the date of purchase and changes in interest rates since then, as well as collateral quality.

In addition, the funds' investment advisor has bought a substantial amount of shares to provide liquidity. It purchased $55.2 million of the High Income Fund and $30 million of the Intermediate Bond Fund in July and August.

The fund has been hit with serious redemptions, according to Morningstar, and this has forced the fund to sell positions at much lower prices and could prevent it from recovering from the current challenges.

The High Income Fund, the worst-performing junk bond fund for the one-, three- and five-year performance periods, is down 35% year to date.

"What was an ocean of liquidity has quickly become a desert," according to the funds' portfolio manager, Jim Kelsoe. "Basic credit measures have eroded to varying degrees."

Advocates See 401(k) Fee Disclosure as Foregone Conclusion

"It's an absolute fact that fee disclosure is going to happen," Rick Meigs, president of, told MarketWatch. "The battle now comes down to what form it takes."

The House Education and Labor Committee has just begun drafting legislation to disclose fees and better indicate investment strategies, risks and returns.

The committee will also debate whether 401(k) plans should be required to offer at least one balanced index fund. "That's a controversial issue," Meigs said. "It could revive a debate over what types of mutual funds are most appropriate for 401(k) plans."

The fund industry has been pushing for target-date funds, balanced funds and separately managed accounts.

Meanwhile, the Department of Labor is also working on recommendations for default options in 401(k)s, as well as more transparent fee and expense information-both for investors and plan sponsors.

"The proposed changes to annual reports make it easier for regulators and plan officials to ensure workers' interests are protected," said Bradford Campbell, assistant secretary of the DOL's Employee Benefits Security Administration.

However, while shareholder advocates said it would lead to lower fees and a better quality of life for retirees because that would boost their savings, business groups are countering that disclosing 401(k) fees to investors would confuse them. Opponents to more disclosure also said it would raise plan expenses. More information would be "burdensome, complex and likely to increase participant confusion rather than enhance knowledge [and] would confuse most participants and possibly hinder rather than help them make investment decisions," testified Lew Minsky, an attorney representing various business groups, including the U.S. Chamber of Commerce, the Profit Sharing/401(k) Council of America and the ERISA Industry Committee, which works with corporations on pension issues.

Whereas companies used to pay plan expenses, they have shifted much of the cost to employees through the higher, retail investment management fees that the funds charge, rather than lower-cost institutional fees.

"We want workers to have information that is presented in clear, straightforward and easily understandable terms, thereby allowing them to make sound investment decisions for themselves," said a spokesman for Rep. George Miller (D-Calif.), who has sponsored a bill calling for more 401(k) disclosure. "Let's be clear: The biggest risk here is not too much disclosure but too little."

Rep. Richard E. Neal (D-Mass.), who has also sponsored a 401(k) disclosure bill, said, "It pays to know what these expenses are."

In addition, Sen. Herb Kohl (D-Wis.) and Sen. Tom Harkin (D-Iowa) are also expected to propose such a bill.

The Government Accountability Office has said that a $20,000 balance in a 401(k) growing at an average rate of 7% a year and being charged a 50 basis-point management fee would grow to $70,555 over 20 years, but only $58,400 if the management fee were 1.5%.

Over 30 years, the AARP added, that would grow to $132,287 with the lower fee but only $99,679 with the higher fee.

"The fee information participants currently receive about their plan is often scattered, difficult to access or nonexistent," David Certner, legislative policy director at the AARP, told the Los Angeles Times. "It's clear that better information is needed."

SEC Raising Bar on Compliance, Examinations

The Securities and Exchange Commission is raising the bar for mutual fund companies' compliance programs, having found 40% of such programs deficient in 2006, according to a new white paper from SEI Investments. Another reason the SEC has higher standards is because of its CCOutreach programs, which are meant to better educate fund compliance and regulatory staff.

All of this is despite the fact that the SEC hasn't enacted any new rules this year. Of the 52 CCOs and fund executives that SEI surveyed, 84% said the SEC's requests have become more onorous, seeking more information ahead of exams and asking tougher questions once examiners arrive.

"The SEC's message to the industry is clear: It expects to see significant improvement in compliance programs," said Jim Volk, chief compliance officer at SEI's investment manager services division. "The bottom line is that senior management must be more involved with compliance, and CCOs have to be more alert than ever before. We're in a new era of compliance that requires heightened awareness."

Recommendations that SEI makes is to stay on top of the SEC's hot-button issues, as these are always changing. Currently, according to SEI, the SEC is most concerned with the use of non-public information in investment decisions, undisclosed fee arrangements, soft-dollar brokerage arrangements, best execution, risk management, and pricing and valuation methods.

Firms should also have policies setting forth a firm-wide culture of compliance and annually audit their compliance programs for missing policies and procedures.

Timing International Funds Appears to Have Ended

Data proves that international fund arbitrage, or market timing in international funds, has ended, MarketWatch reports.

Avi Nachmany of Strategic Insight, speaking at the Investment Management Consultants Association conference, said investors are currently "calm and satisfied" with mutual funds.

"A few years ago, investors were scared," Nachmany said, referring to the eruption of the mutual fund late-trading and market-timing scandal, "in part because they didn't know what was going on and who to trust."

Today, redemptions are at their lowest level in 20 years and occurring at half the rate they were when the scandals came to light.

"What is out of the data now is the pool of abusive market timers, who represented a small number of fund owners but a huge amount of trading activity," he said. "Clearly, many sector investors, who also tend to follow more active trading strategies, have moved to exchange-traded funds, also reducing the redemption activity."

Obviously, the industry should have noticed that the arbitrage was going on, since the rate of redemptions in international funds in the late 1990s and early 2000s was about double that of domestic funds.

Today, however, Strategic Insight finds that redemptions in international and domestic funds are on par.

Funds Run by Both Men And Women Underperform

Teams of women managing mutual funds do just as well as men, in terms of performance, but when the managers are a mix of both men and women, performance often suffers, The New York Times reports.

The conclusion is based on a report called "The Impact of Work Group Diversity on Performance: Large Sample Evidence from the Mutual Fund Industry," conducted by Stefan Ruenzi, an assistant finance professor at the University of Cologne in Germany, and Ph.D. students at the Center for Financial Research in Cologne, Michaela Baer and Alexandra Niessen.

The researchers examined funds managed by a team at any point between 1996 and 2003, for the connection between the gender of team members and performance.

They found that a fund managed by four men will outperform a fund managed by three men and one woman by an average of 1.22 percentage points a year, not because of differences in capabilities between sexes but because of lack of communication. Single-sex teams, Ruenzi said, can operate more effectively.

The findings run counter to earlier academic studies that found mixed teams do better than single-sex teams, such as one conducted by Brown University Assistant Professor of Sociology and Public Policy E. Brooke Harrington. She believes that the two sexes working together bring added perspectives. However, her research was based on the results of investment clubs, which, Ruenzi noted, are run much more congenially than investment firms. And fewer than one-third of team-run mutual funds have a female member of the group.

Indeed, women comprise more than 60% of the members of investment clubs, said Bonnie Reyes, president and chief operating officer of BetterInvesting, an association of investment clubs around the nation.

"The hope that simply introducing diversity will lead to better outcomes is by itself a fool's errand," said John W. Payne, a business professor at Duke University. "Having people with different information isn't in and of itself enough."

Bank of America Starts Program for Ultra-Wealthy

Bank of America has introduced a unified managed account program designed for its wealthy and ultra-wealthy clients.

The program offers clients more customization through multiple, institutional-level separate account managers, exchange-traded funds, and mutual funds in one account that uses an active overlay portfolio manager.

The fee-based program expands Bank of America's unified managed account offerings, building upon the introduction last year of consulting services portfolio strategies-managed programs for affluent brokerage clients. Assets under management for all fee-based investment advisory products administered by Bank of America's consulting services group surpassed $37 billion as of Aug. 31.

Portfolio managers can use the new unified managed account program to build customized asset allocations and then construct portfolios using a combination of separate account investment managers.

Wealthy clients have access to more than 70 investment managers, comprising a range of asset classes and investment styles, including large-cap, small-cap, mid-cap, international, global, fixed-income and high-yield.

In many cases, the accounts will be managed for tax efficiency by the overlay manager. Most investment managers that participate in Bank of America's separate account programs have agreed to participate in the new unified managed account platform.

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

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