Week in Review
July 30, 2007
The Hartford Fined $115M In Rigging, Timing Case
The Hartford Financial Services Group reached a $115 million settlement with regulators in Connecticut, New York and Illinois over charges it conspired with March & McLennan to submit inflated bids on property and casualty insurance, paid hidden fees to brokers and permitted some investors to market time mutual fund sub-accounts in its variable annuities.
Although the firm didn't admit to or deny the allegations, it issued an apology to investors and stated it has "enacted business reform to ensure that this conduct does not occur again."
The Hartford also announced that the Securities and Exchange Commission has concluded its own investigation into market timing and will not be taking any enforcement action against the company.
Bogle Exhorts Boards to Maintain Fee Monitoring
Vanguard founder John C. Bogle blasted American Enterprise Institute Scholar Peter Wallison's claims that market forces keep mutual fund fees in check, in an editorial in The Wall Street Journal.
"It's hard to imagine that Peter Wallison is serious," Bogle wrote, of Wallison's contention that directors need not be concerned with setting fees for investors. Wallison compared boards to local utility commissions. Such commissions stifle free market forces, he said.
Bogle countered: "It flies in the face of common sense." Fund boards don't set fees; they approve structures set by the advisors, Bogle said. Bogle points to Fidelity, where the directors oversee 668 specific mutual funds. Bogle argues that Fidelity makes a handsome profit on most of those funds, while losing on a few, but the fees reflect a relatively consistent average, he said.
American Funds has held its rates at about 1% of assets under management for decades, Bogle noted. But as the firms' assets have swelled, from $282,000 in 1958 to $70 billion today, so do its profits.
The Investment Company Act of 1940 demands that mutual funds keep the best interest of the investor at heart, he said.
"Eliminating fee-monitoring authority of the fund board would belie that sound public policy," he said.
The real way to bring competition is to put the power in the hands of shareholders, Bogle said. That means more independent directors, an independent chairman and a small staff to support them. Each of these is a proposal before the Securities and Exchange Commission.
"To step back from these reforms is to continue to empower the advisor fox to watch the mutual fund henhouse," Bogle wrote.
Some Foresee End to Emerging Markets' Growth
White-hot mutual funds always reach the end of the road, and this could be true for emerging market funds, Investor's Business Daily reports. Even investors' interest in these funds is beginning to dissipate.
Whereas emerging market funds took in $6.5 billion in the first half of 2006, they've only netted $696.4 million in the first six months of this year.
Certainly, they are still delivering stellar returns. Year-to-date through July 11, they are up an average of 23.97%, 39.53% for the past three years and 30.05% for the past five years, according to Morningstar. But this cannot continue forever, said Adam Bold, executive chairman of The Mutual Fund Store.
"I think the risk/reward ratio is out of whack. I'm willing to miss the last 15% to the upside in exchange for avoiding a 50% loss," said Bold, who stressed that the potential for the upside in China, India, Latin America and Eastern Europe has already been factored into their markets.
"I have lived through the collapse of the Mexican market in 1998 and the collapse of the Russian market in 2000," he said. "I've seen this movie a lot of times, and I don't like how it ends."
"Some of the valuations have gone up a lot, trading above historical ranges, so I think there will be corrections," agreed Steve Cao, portfolio manager of the $1.2 billion AIM Developing Markets Fund. However, he is more optimistic than Bold. "I think the current state of the emerging markets is much healthier and in better shape right now to weather the downturn-better than the down cycles that we've seen previously."
Barclays, State Street Plan Municipal Bond ETFs
Shortly after Barclays announced that it was filing with the Securities and Exchange Commission to offer the first-ever municipal bond exchange-traded fund, so did State Street Global Advisors.
The funds, which are still awaiting SEC approval, will likely appeal to higher-income investors looking for the tax advantages of municipal bonds, which are typically not subject to federal taxes. Thus, municipal bonds frequently deliver higher after-tax returns than corporate or treasury bonds.
"This potentially will have a very attractive yield compared to most municipal bond mutual funds," financial adviser Marvin Appel told the New York Daily News. He believes the funds will probably charge fees of 20 basis points, compared to the average 64 basis points on municipal bond mutual funds.