Fund Goes All Out to Block Market Timers
February 5, 2001
American Century Investments of Kansas City, Mo. has filed for the registration of a new fund that would carry harsh restrictions aimed at discouraging market timers from investing in the fund.
The fund, to be named the Avanti Fund, is so far the first that American Century has registered under a new fund family - the American Century Sierra Funds. American Century filed a registration statement and preliminary prospectus Jan. 19.
American Century is requiring investors to provide 15-days' notice when they want to liquidate fund shares, according to the filing. Investors who fail to provide the required 15-days advance notice will receive their redemptions "in kind." This means investors would receive securities for their share rather than cash. The securities could then be sold and converted to cash at the investor's expense.
Investors who do not provide adequate advance notice of a liquidation will have their remaining account assets liquidated and the proceeds returned, according to the filing. Such investors also will not be allowed to again invest in the fund.
To further convey that short-term investors will not be tolerated, the Avanti Fund will carry an as yet unspecified contingent-deferred sales charge which will reimburse the fund's distributor for the marketing and sales costs associated with the original sale of the fund's shares. This is the first time the no-load fund group has attached a deferred sales charge to one of its funds, said Chris Doyle, an American Century spokesperson.
The deferred sales charge is intended to reimburse American Century Services, an affiliated company that is the fund's distributor, said Doyle. Because the fund is being launched as part of a new fund family that will require new sales and marketing literature, the fund's distribution expenses are expected to be significant. The deferred sales charge will help offset those costs, he said. But, a secondary purpose of the deferred sales charges is to scare off would-be frequent traders, Doyle said.
The imposition of a deferred-sales charge does not presage the addition of sales charges to other American Century funds, he said. American Century chose to include the new fund in a new family, separate from the firms 75 other mutual funds expressly to maintain this distinction, said Doyle.
The Fund will also charge investors a redemption fee, which is yet to be determined, if they liquidate their shares within five years of the investment, according to the filing.
The requirement that investors provide
15-days' notice of a redemption, is being imposed to be fair to investors, said Doyle. Timers often force a fund manager to liquidate fund securities to raise cash, which can leave other investors facing higher fund trading costs and potential capital gains or losses, he said.
"This is a way to ensure that a shareholder who initiates the action remains in the fund long enough to feel the impact," Doyle said.
American Century may be setting up barriers which could prevent the fund from attracting significant assets, said Peter Mauthe, president of Trendstat Capital Management, a financial advisory firm in Scottsdale, Ariz. and a member of the Society of Asset Allocators and Fund Timers of Denver. This fund will "need to have great returns compared to its peers in order for investors to willingly choose a fund with restrictive and punitive redemption policies over hundreds of competitor funds who do not have such policies," said Mauthe.
The combined restrictions, while aimed at discouraging market timers, simply go too far, said some fund industry lawyers.
"I think their objective is quite positive, but implementation would create major problems," said Carl Frischling, a lawyer with Kramer Levin Naftalis and Frankel in New York. "Any prohibitions on redemptions will carry over those restrictions to long-term investors who would also be impacted."
Often, fund advisers will directly contact individual shareholders that advisers identify as making too many trades in and out of their funds, said Frischling. Sometimes after a discussion, the frequent trading stops. Sometimes, an investor is asked not to invest in a fund.
But often, these investors are associated with aggressive, market-timing financial planners, who sometimes call themselves strategic asset allocators. In many cases these advisers trade through omnibus accounts with large brokerage firms where neither the investor nor the adviser is identifiable to the fund company, Frischling said. In those cases, the fund company cannot address the problems directly, he said.
"American Century's motivation is absolutely not evil," said one industry attorney. "They are not just trying to lock up assets." But the requirement that investors give 15-days' notice is, "diametrically opposed to the whole concept of an open-end mutual fund," the attorney said. The SEC, which has tried to balance the rights of investors with the needs of fund companies, has not found an ideal solution to the problems posed by market times, the attorney said. But, these restrictions are not likely to be approved by regulators, said the attorney.
The SEC declined to comment.
The Avanti Fund is an aggressive, non-diversified equity fund which will rely heavily on computer models to select the fund's securities, according to the filing. The fund will be co-managed by James Stowers, III, chairman and CEO of American Century and John Small, Jr., an American Century vice president. The pair also manages the American Century Veedot Fund, another fund which relies on computer modeling and carries a high redemption fee and was introduced in November 1999, said Doyle.