Flagging performance. Sales-oriented culture. A history of run-ins with regulators.
All three had already soured some of the nation’s largest financial planners and advisers from funds tainted by the mutual fund trading scandal. Many are telling investors still in the funds to sell.
New York Attorney General Elliot Spitzer named four companies in his September complaint against hedge fund Canary Capital Partners: Bank of America, Bank One, Janus Capital and Strong Investments. Internal reviews at Alliance Capital and Fred Alger Management uncovered evidence of improper fund trading.
Many top planners and fund experts had already given up on the funds. Harold Evensky of Coral Gables, Fla., whose firm manages $400 million, hasn’t used funds in Spitzer’s complaint in years. Same with Lou Stanasolovich, president of the $170 million Legend Financial Advisors in Pittsburgh.
Allan Jacobi, partner at Wetherby Asset Management, a $750 million San Francisco money manager, said his firm had avoided all the funds in the Spitzer complaint except two Bank of America funds.
One reason: performance. ”We don’t use Strong funds or Janus,” Jacobi says. Other companies offered better growth funds, he says.
Steve Savage, editor of <I>The No-Load Fund </I><I>Analyst</I>, a popular investment newsletter, says nearly all the funds in the Spitzer complaint had been off his recommended list, in part because they had grown too large. David Bugen, of Regent Atlantic Capital, a $600 million advisory firm, felt the funds were more interested in sales than money management. ”You can see it in their ads and expenses, and whether they’re promoting a hot manager,” Bugen says.
Some of the fund companies in the scandal have had problems in the past. Strong, for example, was fined $440,000 in a 1994 settlement with the Securities and Exchange Commission for trading violations. The company admitted no wrongdoing. Alliance is being sued by a Florida state pension fund for losses on Enron.
Several had been plagued by big redemptions. Investors yanked $9 billion from Janus stock funds in the 12 months ended in August, says FRC, a Boston fund consultant. Alliance saw $2.6 billion leave.
The redemptions might continue. Savage pulled Nations International Value fund from his recommended list because of the scandal. ”The reason is that the level of the transgressions in the Nations case was so egregious,” Savage says.
Stanasolovich has some clients who have funds named in the Spitzer complaint in their 401(k) plans. His advice: Sell. ”If people don’t vote with their feet, there’s nothing to stop funds from doing this,” he says.
