It’s time to spread a little holiday jeer, with the second helping of my annual Lump of Coal Awards.
Now in their 17th year, the Lump of Coal Awards recognize managers, executives, firms, watchdogs and other fund-industry fumblers for action, attitude, behavior, execution or performance that is misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.
The final 2012 Lumps of Coal go to:
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• The U.S. Securities & Exchange Commission, for needing two extra years to figure out whether a fund’s board was negligent when managers were charged with fraud.
The SEC recently announced charges against eight former directors of the RMK funds for “violating their asset-pricing responsibilities” when funds they oversaw were crushed during the financial crisis of 2007-08.
RMK High Income and RMK Intermediate Bond — both run by James Kelsoe, the Lump of Coal Mis-Manager of the Year in 2007 — held illiquid securities that were improperly valued when daily share prices were calculated.
Basically, the fund board allowed Kelsoe to set the market prices on some subprime paper for which there was little or no market. In many cases, as the subprime market was imploding, the securities were still valued at their purchase price.
The minute real valuations were put in place for the underlying securities, the funds cratered. In 2010, the SEC and other regulators charged the RMK funds’ managers with fraud, accepting $200 million last year to settle the charges.
The directors, of course, deserve our scorn, but they weren’t charged with anything until this month.
It shouldn’t take that long to recognize board ineptitude and wrongdoing. Read the first cases and it is obvious that the managers were aided and abetted by the board’s policies (or lack thereof) and actions (or lack thereof).
To send a statement that fraud falls not just on the evildoers but on their handlers and overseers, the SEC needed to hit RMK’s directors at the same time it was smacking down the managers, making it easier to tack on serious fines to the settlement and making the rest of the industry’s boards stand up and take notice that they will be held complicit if a manager misbehaves on their watch. Instead, the filings made recently went nearly unnoticed.
• Morningstar, in the hope that coal will make the firm get meaner.
Just over a year ago, Morningstar began giving analyst ratings to funds, basically breaking the fund world into three categories, “the ones we like or love” — which get ratings from gold to bronze — “the ones we don’t care about” which get a “neutral” rating, and “the ones we dislike/hate,” which draw a “negative” review. The problem is the firm’s analysts like nearly two-thirds of the funds they review, while just 5 percent of the rated funds get negative marks.
That’s less fund watchdog, and more fund lap dog.
Morningstar howls at that criticism, however, with officials noting that it has rated roughly 1,050 funds and that the process is complete, meaning that about 6,100 funds (using just one share class per fund) will go unrated. Those unrated issues are funds where the firm doesn’t believe it is worth the time and effort of its analysts, tiny issues that just aren’t drawing much money and that will be worth rating only if their record and asset growth attract mainstream attention.
That’s a de facto analysis and when you throw those issues into the mix, Morningstar officials note that medalists account for 9.5 percent of the entire fund universe, thus showing investors a small, focused target group.
It’s a good point, but it doesn’t change the problem.
Presumably, the average investor is ignoring the same funds that Morningstar chooses not to rate, and for the same reasons.
They don’t need Morningstar’s help for that (proven by the fact that so many of those funds are small and not worth the firm’s analytical time).
If investors gravitate naturally to funds worthy of analytical attention, giving two-thirds of those funds a medal weakens the value of the ratings; there needs to be more bite behind the firm’s bark.
•The SEC, again, for its failed attempts at money-market fund reform, 12b-1 fee reform, and the establishment of a fiduciary standard for financial advisers.
The SEC had a lot of important, worthwhile initiatives on its agenda this year, and while it could be argued that it was too aggressive in its stalled quest to change the money-fund business, there’s no arguing that the agency accomplished virtually nothing on those key challenges.
In fact, it pretty much looks like the agency has given up, and with SEC Chairman Mary Schapiro moving on, all of these initiatives will lose ground before they have a possibility of picking up steam under new leadership.
In short, the agency has a lot of good ideas; the problem is that it can’t get them past the idea stage.
• The USX China Fund, for the year’s worst performance.
If you want to know why some investors are nervous about China, look at USX China (HPCCX), a tiny fund that personifies “what’s the worst that could happen?”
It’s down more than 65 percent this year, the only operating issue in the entire mutual-fund realm to have dropped more than 50 percent.
Worse yet, according to Morningstar, the average China Region fund is up about 15 percent year-to-date. A new manager — who took charge in February — has not helped.
If the fund had significant assets (instead of just about $1 million total), and if it hadn’t been down by even more in 2011, when it shed 73 percent at a time when its average peer was losing about one-third that much — USX China would be the Lump of Coal Mis-Manager of the Year.
• The team at Westcore Select, the Lump of Coal Mis-Managers of the Year.
Someone has to finish last, but there’s a difference between simply lagging peers and shocking shareholders, and investors in Westcore Select (WTSLX) must be stunned this year.
It’s not just that the $185 million fund with its concentrated portfolio — something rare in the mid-cap growth space — is dead last in its peer group, according to both Morningstar and Lipper, or even that the fund is in negative territory.
The problem here is that no other fund in the category has lost ground this year, according to Lipper, while Westcore Select is down nearly 14 percent.
In fact, the average fund in the group this year is up about 12 percent; if not for a sister Westcore fund that is barely in positive territory, Westcore Select would lag its closest peer by 18 percentage points. That will put a damper on your holiday spirits.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at P.O. Box 70, Cohasset, MA 02025-0070.
Copyright, 2012 MarketWatch