Funds Give Up on 'Best Picks' of Analysts
>>"These funds, the 'best picks,' tended to be marketing driven, rather than investing driven," said Burt Greenwald, a fund industry consultant. "I question whether there's any basic intrinsic value in these things, and I assume that any fund a company offers represents the best ideas they have."<<
By James Paton
NEW YORK (Reuters) - Wall Street's high-profile stock analysts once carried so much clout with investors that the leading investment houses proudly built mutual funds around their "best ideas."
Now, with the analysts better known for the famous bad calls they made on Enron (Other OTC:ENRNQ.PK - News), WorldCom (Nasdaq:WCOME - News) and Internet stocks, their firms are giving up on the concept. Wall Street firms are abandoning funds that relied on their research departments' top stock picks, at a time when "sell-side" analysts have been tainted by allegations of bias and conflict of interest.
"In this environment, it's obviously a pretty tough sell," said Russ Kinnel, director of research at Morningstar Inc. in Chicago. "Wall Street stock recommendations are of very little value" because they tend to tout investment banking clients.
Goldman Sachs Group Inc. (NYSE:GS - News), Morgan Stanley (NYSE:MWD - News) and Bear Stearns Cos. (NYSE:BSC - News) offered portfolios that relied purely on recommendations of their brokerage analysts, instead of ideas from the stock sleuths on their money management teams.
But now, Wall Street faces mounting scrutiny over allegations that juicy bonuses and pressure from executives have driven its analysts to issue overly rosy reports favorable to their firms' banking clients, or potential clients.
Mutual fund firms and other big investors lack those inherent conflicts. Compensation for fund analysts and managers depends largely on their stock-picking ability, not whether they steer profitable investment banking deals to their firms.
"There's a bad odor surrounding these analysts," said Roy Weitz, who runs the watchdog Web site FundAlarm.com. "The sell side (brokerage house business) is in the dog house right now, so they probably said, 'Let's just wipe the slate clean."'
The Goldman Sachs Research Select Fund and the Morgan Stanley Competitive Edge "Best Ideas" Fund announced in documents filed with U.S. regulators that they are giving up on their original mandates, depending now on their traditional fund managers and in-house analysts, rather than brokerage analysts.
Representatives for those firms declined to give reasons for the moves. But weak performance appeared to be a factor, since the funds have generally done worse than the market as a whole.
The Goldman Sachs fund has fallen 37 percent in the last 12 months, while the Morgan Stanley portfolio is down 24 percent in that period, according to Morningstar. Meanwhile, the Standard & Poor's 500 Index, which the Goldman fund aimed to beat, has dropped 25 percent in the last 12 months.
The $154 million Research Select Fund now will be run by stock pickers on the firm's value and growth investment teams. The fund had been based on the firm's U.S. Select List, a batch of stocks recommended by its stock analysts. But the list was discontinued when Goldman Sachs announced changes to its stock rating system last month, a spokeswoman said.
The $30 million Morgan Stanley fund, which relied on the "Best Ideas" list compiled by its stock research team, has changed its name to the Global Advantage Fund, and will look for an array of investment opportunities around the world.
Bear Stearns has renamed its Bear Stearns Focus List Portfolio the Bear Stearns Alpha Growth Portfolio, effective Aug. 1. The fund is no longer modeled on the "buy" list of the Bear Stearns research department.
A spokeswoman for Bear Stearns Asset Management said the change was not related to concerns about sell-side research or fund performance, saying the fund changed its strategy so it could use the techniques of new manager Jim O'Shaughnessy, who uses quantitative models to pick stocks.
"It's definitely not related to any of the research issues," spokeswoman Braden Bledsoe said.
Attracting money into funds that highlight Wall Street analysts' research may have been easy when everyone was raking in money during the bull market -- but not today.
"These funds, the 'best picks,' tended to be marketing driven, rather than investing driven," said Burt Greenwald, a fund industry consultant. "I question whether there's any basic intrinsic value in these things, and I assume that any fund a company offers represents the best ideas they have."
biz.yahoo.com |
