Backlog of Cases Puts SEC's Future in Question

With a backlog of mutual fund and hedge fund cases at the Securities and Exchange Commission, the departure of two Democratic commissioners and SEC Chairman Christopher Cox's unusual vote in favor of two contradictory proposals on shareholders' rights to nominate board trustees, the future of the SEC is in question, the Los Angeles Times reports.

But as recently as this past summer, the SEC seemed like a unified group, and Cox was being heralded for creating a sense of unity at the SEC, which had been known for acrimony for years.

"If you're looking at a man trying to hold the moderate group [and] maneuver through very partisan waters and come out above it," the SEC's testimony before the Senate Financial Services Committee in June "is as good an exhibit of that as you will find," said Damon Silvers, associate general counsel at the AFL-CIO.

"Chris Cox has done a fine job of leading the Commission," said Harvey Goldschmid, a former SEC commissioner and now a law professor at Columbia University. "But he is now entering a period where his leadership skills and ability to remain on a balanced course will be severely tested."

Shareholder activists are now sharply critical of Cox for voting in favor of two contradictory proposals on shareholder rights. The first would prevent shareholders from being able to nominate board members. The other would only allow shareholders with holdings of at least 5% of outstanding stock, held for at least a year, to name director candidates on a proxy slate.

"Certainly, when you have a chairman vote for two conflicting proposals at the same time, it's problematic," said Lisa Woll, chief executive officer of the Social Investment Forum. "It's very unclear from his votes what his actual view is, because he's taken two views."

Vanguard's, Fidelity's Retirement Income Funds Take Very Different Tacks

Fidelity and Vanguard recently introduced retirement income funds, and while they both offer monthly payments that can vary from year to year, they are actually very different from one another, The Wall Street Journal reports.

Fidelity's funds spend the assets down over a period of time that investors select, much like a target-date fund. Vanguard's funds make payments that are calculated based on a rolling three-year average account balance. Investors can select target withdrawal rates of 3%, 5% or 7%. The 3% rate is if they want their balance to grow, while the 7% withdrawal rate is still meant to keep the balance steady.

But critics say that if the market should drop, monthly payments could ostensibly go to zero. Also, people who underestimate how long they will live could end up with no money years before they pass away.

As Funds Turn to Complex Securities, Prices at Risk

While the closing of the hedge fund at Dillon Read was due to the difficulty in valuing subprime mortgage-backed holdings, the problem of fair valuation is permeating a wide number of other hedge funds and mutual funds, The Wall Street Journal reports.

In fact, the prices for far less than half of securities traded on exchanges are readily available, according to Daniel Harris, an analyst with Goldman Sachs.

Certainly, Warren Buffet has long called for more price transparency. "Some markets can be pretty imaginative. They call it marking to market,' but it's really marking to myth."

Commenting on the lack of available prices on bonds, typically published in what is known as the "daily axe" or "daily run," Greenwich Associates Consultant Timothy Sangston said, "There is a general reluctance on the part of dealers to be publishing prices, because it is so uncertain and there is not a lot of liquidity."

The Securities and Exchange Commission is now examining how mutual funds value their securities.

Fidelity Wants to Split Fund Board in Two Due to Complex Holdings

Fidelity Investments will ask shareholders early next year for permission to split the board of directors overseeing its mutual funds in two. The aim is to better monitor the complex securities its portfolio managers are increasingly gravitating to.

One board will oversee equity and high-yield funds, and the other bond, money market and asset-allocation funds.

Fidelity expects that its product mix will become increasingly diverse and that the need for two specialized boards will grow, Ned C. Lautenbach, one of the members of the Fidelity funds board, told the Boston Globe.

Currently, there are 11 people on Fidelity's board, only two of whom are interested parties. They are Fidelity Chairman and CEO Edward "Ned" Johnson and James C. Curvey, a longtime Fidelity executive. By splitting the board in two, the company will seek additional directors.

Because Fidelity's current board oversees 370 funds, considered to be on the high end, Morningstar has rated Fidelity's mutual fund board C. Morningstar analysts said they were "not convinced that this board diligently oversees each fund individually."

Stronger Performance Fails To Boost Fidelity Flows

Although Fidelity's mutual funds have been delivering solid returns, many investors have been taking billions of dollars worth of business elsewhere, The Wall Street Journal reports.

"Fidelity's funds, which tend to be growth-oriented, are having a very good year," said Morningstar Analyst Dan Culloton. "But their fund flows are lagging that outperformance in the market."

So far this year, for instance, Fidelity's flagship Magellan Fund, which is up 20.1% year to date, thereby beating 71% of its large-cap growth peers, has suffered $6 billion in outflows, while eight other leading Fidelity funds have lost a combined $23 billion, according to Financial Research Corp.

At the end of 1999, Magellan had $105.9 billion in assets. That's now down 57% to $45 billion. The Fidelity Growth & Income Fund alone has lost the largest amount of assets so far this year, $8.9 billion.

"Generally, we don't believe that investors should chase performance, but they do, and it takes time for the average investor to catch on," Culloton said.

Many industry experts have applauded Henry Lange, who took over as Magellan's portfolio manager two years ago. "He significantly changed the structure of Magellan's portfolio, emphasizing more tech and foreign names," said FRC Analyst Owen Concannon. "Since then, outflows have moderated."

Portfolio Manager Predicts Inevitable Collapse Of Many Hedge Funds

Disappointed by returns, investors in many hedge funds will withdraw as much as $500 billion of their money, leading to the inevitable collapse of a number of hedge funds, the Financial Times reports, citing the predictions of hedge fund-of-funds manager Giles Conway-Gordon, a managing partner with Cogo Wolf.

Too many hedge funds run quantitative models that cannot deliver strong returns, Conway-Gordon said.

"I don't think [the hedge fund industry] can support $2 trillion in assets. I think we are going to see large numbers of hedge funds go out of business, and rightly so," he said. "Hedge funds are supposed to avoid losses when things are bad, but there are very few of them that can break even then. I think a lot of them are not earning their keep.

"I think we are going to see a very sharp Darwinian process in the next six months," Conway-Gordon added. "Things have been too easy for too long, and I think cold winds are about to blow."

90% of Larger DC Plans Offer Target-Date Funds

New research shows that 90% of large and mid-size 401(k) plans offer target-date funds, but only slightly more than half of small plans have one or more target-date funds in their lineup.

Nearly 70% of large and mid-size sponsors said participants like the target-date fund approach, while 57% of small plan sponsors said so.

However, only 17% of the assets in large plans are in target-date funds, while 23% of the assets in both mid-size and small plans is in these funds. Large plans are considered those with more than $200 million in assets, and mid-size are those with between $20 million and $200 million.

The research was sponsored by RiverSource Investments, an Ameriprise Financial subsidiary.

"The high acceptance of lifecycle funds by most mid and large plans reinforces our view that plan sponsors see these funds as an effective asset allocation solution for retirement plan investors," said Chris Keating, head of institutional sales and client services at RiverSource.

"We believe that the adoption phase of lifecycle funds is nearly complete for mid and large plans, which should set the stage for a new breed of lifecycle funds and increased competition in the marketplace."

Nasdaq Launches Index Of Eligible Listings

Nasdaq has introduced a new index of 50 companies, called the the Nasdaq Q-50 Index, that it is considering including in the Nasdaq 100 Index.

Already some are saying that it will be the basis for an exchange-traded fund much like the PowerShares QQQ, based on the Nasdaq 100 Index. The QQQ is often the most heavily traded security on any given day.

"The Nasdaq Q-50 Index is a new benchmark for some of the world's most up-and-coming growth companies," said Nasdaq Senior Vice President Steven Bloom. "The index arms investors with a portfolio of some of Nasdaq's fastest-growing companies in a diverse range of industries" that includes computer hardware and software, telecommunications, retail/wholesale trade and biotechnology.

Growth Fund of America Hits $200B, Stays Open

American Funds' Growth Fund of America has become the first mutual fund to ever top $200 billion, The Wall Street Journal reports.

But now that it's reached that gargantuan size and its performance has become average, some shareholders are pressuring it to close to new investors. Certainly, this month, Morningstar took away one of its stars, ranking it now as four-star.

Nonetheless, executives at American Funds said that the fund can remain open because it's managed by a team of analysts and 10 portfolio managers, each of whom manages a separate basket of cash. This, they said, fosters creative thinking.

They also noted that rather than net flows, most of the fund's appreciation has been due to market growth. They added that research shows that funds tend to underperform after they are closed.

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

http://www.mmexecutive.com http://www.sourcemedia.com

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.