Week In Review
June 22, 2009
One-Third of Funds Still Sitting on Cash: While there have been reports of portfolio managers easing back into stocks, one-third of them are still sitting on record amounts of cash. Until the housing market stabilizes and corporate earnings become strong, they say, they are not convinced the market will deliver consistently strong returns, even though the S&P 500 has risen some 40% since its March 9 low.
"I'm not sure it's so far away, but I don't think we've seen the bottom yet," Nick Kaiser, a portfolio manager with the Amana funds, who has a whopping 30% of his holdings in cash, told SmartMoney.
Dave Ellison, manager of large-cap and small-cap financial services funds at FBR Capital Markets, said, "This is not about making the bottom. It's about making a fundamental judgment that companies can grow and be profitable again." He is waiting for banks and asset managers to rid their balance sheets of toxic assets and for the government to stop buying these toxic assets.
Fund Stocks Soar 54%
Shares in publicly traded mutual fund management companies have soared 54% this year, compared to approximately 5% for the S&P 500 Index, but that growth may be about to slow down as fund companies catch up on paying expenses they have been putting off, USA Today reports.
Fund companies have expenses to pay regardless of whether markets rise or fall, but because investors hate to pay fees when they're losing money, many fund companies made big cuts or delayed certain projects to keep these expenses as low as possible.
Matt Snowling, an analyst for FBR Capital Markets, said fund companies that slashed their expenses during the bear market could begin to spend more as stocks rise, and he suggested the rally in fund company stocks may already be over, noting that T. Rowe Price has already doubled since March 9.
Evergreen Restates Second Fund's Value
After consenting to a $40 million fine by the Securities and Exchange Commission for inflating the value of mortgage-backed securities in its Ultra Short Opportunities Fund, Evergreen Investment Management is now being investigated by the Massachusetts Securities Division for valuations in another mutual fund and a variable annuity.
The second fund in question, the Evergreen Diversified Income Builder Fund, and the annuity also were invested in specialized mortgage-backed securities, or collateralized debt obligations. In addition, the valuations of other Evergreen funds may be faulty, the firm indicated in a letter to clients.
Massachusetts' order against Evergreen and sub-adviser to the Ultra Short fund, subsidiary Tatterall Advisory Group, notes that the goal of the Ultra Short fund was to "provide current income consistent with preservation of capital and low principal fluctuation," yet, even though it was marketed as investing in safe instruments, it invested in riskier mortgage- and other asset-backed securities, as well as derivatives. Many investors knew little about the Ultra Short fund, the order also said.
Starting in at least July 2007, the fixed income market began to experience pricing issues due to illiquidity in the marketplace. Rather than accept third-party vendors' fair value pricing, in December of that year, the portfolio management team began rejecting their figures and coming up with internal values of its own. Beginning two months later in February 2008, as the market further deteriorated due to lack of trading, the internal group was repeatedly forced to reprice many of the fund's holdings to zero from earlier internal pricings of $50 to $60.
After a series of significant reductions by pricing vendors in 15 holdings in the Ultra Short fund, and fear of massive redemptions, on June 12, management decided to call financial advisers about the fund based on assets and relationships. Evergreen did not reach its other, retail sales channels about the fund until the following day. Still, not all of the financial advisers whose clients held shares in the fund were reached, so over the course of the next few business days, the wholesaling team continued to contact customers.
Court Sets Deadline for Objections to Reserve Plan
A U.S. district court has given investors in the Reserve Funds' Primary Fund until July 22 to object to the Securities and Exchange Commission's plan to distribute assets on a pro rata basis. Of the fund's original $63 billion in assets, $4.55 billion has yet to be returned to investors. Following this first round of filings, Reserve has until Aug. 21 to respond to those objections.
34% of Americans Worried About Retirement Outlook
Americans are increasingly worried about their preparedness for retirement, The Hartford found in a survey. Thirty-four percent were either "extremely" or "very" worried about their ability to save for retirement, and 56% said they feared they would have to cut back on their contributions.
Additionally, 53% said they expect their employer will either reduce or eliminate their matching contributions to their 401(k) plan.