To All, Last week I posted here how large mutual fund cos. create a rocket fund by using their corporate clout to obtain hot IPOs, and load those into one fund small enough to make a huge difference in its performance. Well, to my surprise, my former employer, Van Kampen Funds (it was called American Capital back when I was the lead fund manager), just got fined $100,000 for not disclosing how much of its performance of up 62% in its first year was related to hot and fairly small IPOs. It seems that IPOs contributed nearly all the return, with any stock picking or research contribution merely coincidental. And the portfolio manager was fined $25,000, a horrible precedent, IMHO. <g>
Several things should be noted: 1. Feeding IPOs into new funds is not illegal. It just has to be disclosed. However, it is unethical to sucker folks in because they think they have a smart portfolio manager when they really are just buying sure things for hot trading. That technique is not sustainable, as the fund grows, IPOs lose their ability to move the fund. You may get enough in IPOs to move a dinky $50 million fund, but for a billion dollar fund, it is a non-event.
2. American Capital was ethical to the point of being ridiculous when I worked there. It is ironic that when they finally capitulate to situational ethics and imitate the shenanigans other firms have pulled for decades, they get caught.
3. I never knew this portfolio manager. Since I left, new mgt. has pretty much fired most of the folks who had made the Forbes Honor Roll in equities. Some of the replacement
managers were also pretty good, but the new closet indexing mode has prevented most from doing well.
4. The lesson: Never buy a fund that was hot and small last year. Always buy a new aggressive equity fund brought out by a huge fund co. during a manic upside bubble. If you get the opportunity, which you probably will not. |
