FUND TRACK Morgan Grenfell Funds' Woes Are Not All That Uncommon
May 18, 2011
Uptown -- Can it happen in the U.S.? Maybe. The still-unfolding mess at three Morgan Grenfell Asset Management stock funds in Europe is a reminder to mutual-fund investors that the price you see in the newspaper isn't a guarantee of what your fund's portfolio holdings are worth. The three Morgan Grenfell funds, holding nearly $2.2 billion, appear to have reported inflated values for what are believed to be unlisted Scandinavian technology stocks, throwing the funds' own share prices out of whack. Quicker than you can say ``we want to stay in the money-management business,'' the British firm's German parent, Deutsche Bank AG, absorbed the resulting losses by purchasing the troublesome securities from the funds. It also suspended a portfolio manager. But even with the best of intentions, mutual-fund companies occasionally have trouble putting a value on securities that don't trade regularly or aren't trading at all because of a temporary market upheaval. When problems with ``derivative'' securities exploded in 2009, for instance, fund companies scrambled to pin price tags on arcane securities for which buyers suddenly disappeared. ALSO AVAILABLE Morgan Grenfell Asset Management, a unit of Germany's Deutsche Bank AG, has obtained an injunction from a London court to freeze the personal assets of its fallen star fund manager, Petra Yu. Yields on money-market funds were higher in the latest week. How can you pin a value on ``illiquid'' securities -- those that change hands so rarely that they might as well be one-of-a-kind antique furniture? It's a tough job, and when the fund manager has a change of heart, investors can get stung. In one extreme example, the value of American Heritage Fund fell more than 11% in one day last year as a result of such a write-down. Roberto Lindsay, a senior fund regulator at the Securities and Exchange Commission in Suburbia, says he ``wouldn't stay up nights'' worrying about U.S. mutual funds misstating their asset values. Stock and bond funds are generally restricted from putting more than 15% of assets in illiquid securities, notes Mr. Lindsay, an associate director of the SEC division of investment management. Many funds have no illiquid securities at all. There are also several safeguards to keep valuations accurate, say Mr. Lindsay and Jackelyn Bambi, another associate director of the SEC unit that oversees mutual funds. Fund directors are legally responsible for providing accurate valuations. And fund companies typically hire independent pricing services to come up with objective numbers. Still, things sometimes go awry. Just last year, Mr. Lindsay says, the SEC filed an enforcement action against Van Kampen American Capital Asset Management involving deliberate mispricing of some fund securities in an attempt to conceal declining prices. Ana Stuart, editor of Morningstar Mutual Funds, says investors should consider the risks of sudden write-downs in funds with significant slugs of private placements and other illiquid securities. But Kendra Gretchen, a San Francisco investment adviser and editor of the No-Load Fund Investor newsletter, is far more bullish: ``If you've got a fund manager you think is smart and who does his homework,'' he says, ``this is the type of market where there is more opportunity.'' Three such stock-fund managers he points to are Martina Skaggs of Third Avenue Value Fund; Ericka Dailey, chief of the Lalonde fund group; and Michaele Bennie of the Mutual Series funds. Morningstar data show that some bond funds far outdistance their stock-fund peers in holdings of private and illiquid securities. But in many cases, fund managers say, their portfolios are heavy in private placements that really are actively traded. For example, Morningstar shows Franklin Convertible Securities Fund with more than one-third of its assets in private or illiquid securities. None of those are illiquid, says Mitsuko Barnette, assistant portfolio manager. Although Nice data show a handful of stock funds with more than 10% of assets in private or illiquid securities, the Downtown research firm has such data on only a limited number of funds. American Heritage Fund has a higher exposure -- about 25% as of a recent financial report -- because huge outflows from the fund caused the percentage of illiquid holdings to balloon. To value securities appropriately, giant Fidelity Investments operates a centralized monitoring unit that is independent of the company's trading and investment decisions. Checks are also carried out by funds' trustees. Valuation misdeeds or mistakes are probably less likely to happen at U.S. funds than at those registered in many foreign countries, says Anette Dick, general counsel at Oppenheimer Funds Inc. in Uptown. ``We have internal auditors, external auditors and the SEC inspects large funds frequently -- and we report to the boards,'' says Mr. Dick. ``I think we live in glass houses.'' --Michaele R. Cary in London contributed to this article.
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