By now, everyone has recognized the problems in the financial-services industry. And after 2008, when the average stock fund lost about...
By now, everyone has recognized the problems in the financial-services industry.
And after 2008, when the average stock fund lost about one-third of its value, it was impossible for investors not to recognize problems in their funds.
But the question remains whether investors will recognize when the troubles affecting the industry will hit home with their fund, and make it less able to deliver a bounce-back in the future. And if your fund company is having troubles, you need to be on the lookout to see if the way it deals with issues hits home.
“Your thesis for investing in a fund is that management will outperform over a long time horizon,” says Stephen Savage, editor of the No-Load Fund Analyst newsletter.
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Watch for changes
“If the fund is changing because of what is happening with the parent company — if assets are way down or the manager is leaving or the analysts are being laid off — you’ve got something to think about and keep an eye on,” said Savage. “None of these issues start out as you-must-sell problems, but you can certainly see cases where the fund company has problems that wind up becoming problems for the funds.”
As fund assets have been shrinking, some mid-sized fund companies have come under pressure, where if they can’t deliver decent results going forward they will be looking at being sold by year’s end. While recent deals have been pretty small — like the Seligman funds being absorbed into RiverSource funds — there’s little doubt that some bigger names will be on the block by midyear.
It’s important to note that if a financial company is having troubles, that does not automatically trigger problems for a fund. Each fund is organized as a separate entity; the management company can’t just dip into a fund’s assets to meet its other needs.
In fact, if the management company were to fail, the fund directors would be charged with either liquidating the fund and sending shareholders their portion of its net assets or picking a qualified replacement manager.
Trouble can surface long before things get to that catastrophic level, however. Among the asset-management firms that have announced layoffs are Fidelity, Janus, Putnam, BlackRock, Alliance Bernstein, MFS, State Street, Legg Mason and Boston Co. (which manages the Dreyfus funds).
Fidelity is cutting 3,000 employees from its payroll by the end of March; that’s 7 percent of its work force. Putnam has laid off more than 250 workers, including about a dozen portfolio managers and some analysts. There are investment personnel in the AllianceBernstein and BlackRock cuts, but not in the Janus and Legg Mason deals.
“The highest cost is going to be the analyst and the portfolio manager, and if a firm needs to make meaningful cuts, it won’t get enough from simply dropping the relatively low-cost support staff,” says Geoff Bobroff of Bobroff Consulting, an East Greenwich, R.I. firm that works with fund-management companies.
“If they can avoid cutting managers and analysts at first, but the problems get worse, they won’t be able to avoid those kinds of cuts forever. The question is how those changes affect you.”
Savage suggests that bad news for the fund company can be good news for the shareholder.
“You are seeing a fund’s assets shrink, to where it maybe doesn’t need the same support staff,” Savage says, “and if they have six people and have to let go of one or two, you’d expect that the weakest people — the worst analysts — will be the ones to go. So your management team could get better, but there’s no guarantee; you could also lose the manager who you liked to begin with because cutting him saves the firm the most money.”
Further, if a management company is looking to streamline, it may merge similar funds, reducing duplication, allowing fewer staff members to do more. Any fund with under $50 million in assets is a candidate for what industry wonks call “rationalizing the product line,” the rare move when firms rethink their operations and purge their excesses, like sister funds with heavy overlap.
While shareholders sometimes are asked to approve those deals, there’s no sense fighting them, as the firms will go through one proxy fight after the next, at shareholder expense, to get the deal done.
With that in mind, the only thing the shareholder should be looking at is whether the post-merger fund will be attractive, based on its management and support team, fee structure, the asset categories it invests in and so on.
“Don’t assume that every change will be bad for you,” says Savage, “but if your fund company is making headlines because of its problems, you need to make sure that the same things that attracted you to the fund in the first place are still there.”
Copyright 2009, MarketWatch
Chuck Jaffe is a senior columnist at MarketWatch. He can be reached at email@example.com or Box 70, Cohasset, MA 02025-0070.