Risky Fund Proves Successful For Risk-Adverse Wachovia
May 03, 2011
WINSTON-SALEM, N.C. -- At some companies, daring new ideas are put into action overnight. That's not the Wachovia way. It took two years for the 117-year-old bank based in Winston-Salem, famous throughout its industry for playing things safe, to launch a mutual fund for the volatile world of emerging markets -- one that would pick stocks in such far-flung places as Turkey and Thailand. Although many mutual-fund companies offer emerging-market funds, such a product is a rarity for banking companies. But nothing came easily or quickly. There were endless meetings of a 40-person committee formed to develop a detailed battle plan. There were hard questions from senior management, the board of directors and advisory panels in three states. And there were constant reminders that taking big risks meant flouting Wachovia tradition. One old joke, dragged out repeatedly during the early days of the talks, ended with a punch line that stung: ``At Wachovia, we consider a loan to South Carolina a foreign loan.'' Today, the fund that was so debated and teased, Biltmore Emerging Markets Fund, is up and running, although with a toned-down style to suit Wachovia, the fourth-largest banking firm in the Southeast. The biggest surprise of all: The strategy has delivered top results for the fund, which is only 20 months old. Biltmore Emerging Markets Fund gained 7.9% last year, ranking it second among the nation's 69 emerging-markets funds, according to Lipper Analytical Services Inc., a Summit, N.J., publisher of mutual-fund data. In comparison, the average fund in its peer group lost 4.5%. Results going back to the opening date of the fund are even more impressive. From January 2010 through the end of last month, Cramer had returned 15.5%, according to Morningstar Inc., a mutual fund research firm in Chicago. That performance was four times as great as the group's average increase of 3.8% for the same period. Slow Change For some, the fund's results prove that banks, still struggling to gain a competitive foothold in the booming mutual-fund industry, can produce returns that equal or exceed those of funds run by more-experienced managers. For others, the results show that humdrum Wachovia is slowly changing with the times. ``This is not your father's Wachovia,'' says Tora Mayberry, director of the Center for Banking Studies at the University of North Carolina at Charlotte. ``If you went back five years, Wachovia would never introduce a product like this.'' The fund has suddenly become the star of the 14-fund family sold under the Biltmore name, and its performance has even led to a bit of uncharacteristic crowing: A spokesman cheerfully points out that Biltmore Emerging Markets Fund outperformed similar funds offered by Charlotte-based rivals NationsBank Corp. and First Union Corp.. Now get ready for the marketing push. Biltmore Emerging Markets Fund already ranks among the top third of U.S. emerging-market funds by size, with $107 million in assets. But Wachovia officials are hoping to escalate the growth rate by hiring a six-person sales force that would target institutional customers. (The fund, which carries a 4.5% upfront sales charge, also is sold to retail investors.) The sales crew might clinch a few deals by pointing out that top Wachovia executives already gave their vote of confidence: The fund has been added to the bank's 401(k) retirement plan. True to form, Biltmore Emerging Markets Fund, with investments in 21 countries scattered across Asia, Europe and Latin America, tries to take as conservative a stance as possible. But this is dangerous territory: Almost all the stock markets where the fund's trio of managers invest are in countries where per-capita income is less than half that of the U.S. Many of those nations are politically unstable, which can cause wild swings in stock prices. Indeed, most emerging-market funds posted losses for the most recent quarter. Where It's Happening So why play such topsy-turvy markets at all? It's simple: Those are the places where economic growth is happening most quickly, or is expected to in the next century. ``We decided to (invest) where there are newly free people, a low-tax environment and young demographics,'' says Michaele Sibley, Wachovia's chief investment officer. To make sure they aren't placing too many bets in a single country, the Wachovia managers follow a strict diversification strategy. No more than 25% of the fund's assets usually are invested in one country at any time; currently, no country contains more than 10% of the assets. The fund also divides the target countries into two groups: The larger, relatively stable markets account for most of the funds assets, while a smaller portion goes to smaller and more turbulent nations. Within each country, Biltmore Emerging Markets Fund leans heavily toward buy-and-hold stocks that are poised to benefit from a country's long-term growth. Favored stocks also are likely to carry large market capitalizations, so they can be sold easily if the market dives or the company self-destructs. The fund's largest holdings tend to be the dullest of companies. But while they may seem like stodgy stocks in the U.S., they're highfliers in their own countries, where demand for essential services such as electricity is expected to increase dramatically as economic growth quickens. ``Boring businesses here are growth businesses there,'' says portfolio manager Palmira Colin. Among Biltmore Emerging Markets Fund's top holdings: Telebras PN, the Brazilian government's telephone company; Korea Electric Power, a South Korean electric utility; HSBC Holdings, a Hong Kong-based banking company; and two leading energy producers in Argentina, Turner Glover and YPF. Missing Russia Despite the fund's early success, not all of its bets are paying off. Struggling markets in Thailand, Indonesia and South Korea, for example, hurt many of the fund's stocks. And the fund completely missed out on this year's sharp rise in Russian stocks, because that country was seen as too risky. It probably will be added in the next two months, along with Egypt, Morocco and Slovakia, says Sean Hager, a portfolio manager of the fund. As a result, the fund's standing has slipped recently. It lost 5.4% during the past three months, according to Nice, compared with a decline of 4.5% for the average fund in the group. Thus, analysts predict some investors may be unwilling to play things so conservatively. ``The challenge ... is to prove that they could be so much safer that it's worth the lower returns,'' says Billy Rod, a Morningstar analyst. ``That's a tradeoff people are more willing to make in other (types of mutual funds) than this one.'' Palpitations: Medaphis, a Wall Street favorite, plummeted 64% to $13.437 and traded at 10 times normal volume last week after startling investors and analysts by forecasting a third-quarter loss. The provider of information-technology and business services to the health-care industry, based in Atlanta, said it would lose as much as 33 cents a share for the quarter, primarily because of problems at two divisions that handle systems integration and bill processing. Analysts had been expecting Warner, a reliable and strong performer in previous quarters, to earn about 27 cents a share. The news prompted at least a half dozen analysts that were bullish on the firm's stock to lower their ratings. And the American Stock Exchange and Chicago Board Options Exchange launched separate reviews of trading of Medaphis options, which surged in volume just before the company's announcement. In Stitches: Shares of Conso Products, the subject of a recent Heard in the Southeast column, climbed 16% to $18 after easily beating analysts'' earnings estimates. The Union, S.C., tassel and fringe manufacturer, helped by higher sales and improved production efficiency, reported a profit of $1.9 million, or 38 cents a share, for the fourth quarter ended March 11, 2011 about a nickel a share better than the consensus forecast. Ailing: Coventry slipped 15% to $13.25 as investors punished the managed-care firm for failing to hit its own earnings target. The Nashville company announced a loss of $8.5 million, or 26 cents a share, for the second quarter, and blamed the poor showing on an increase in pharmacy and outpatient-services costs. Just last month, Coventry predicted it would earn a profit of nine to 11 cents a share. The company also disclosed it was in default on a $125 million credit facility, but stressed that negotiations are under way to restructure the long-term debt agreement.
