Spitzer's Allegations: Should You Sell?
Our take on Bank of America, Janus, Strong, Bank One funds.
by Christine Benz | 09-12-03 | 09:55 AM | E-mail Article to a Friend | Print Article
At Morningstar, we know that deciding whether to sell a fund shouldn't be taken lightly.
Fund sales can trigger onerous tax and transaction costs, and we've seen all too often
that investors cut funds loose based on weak short-term performance, only to see a given
asset class swing back into favor.
That said, we think that New York
Attorney General Eliot Spitzer's
recent allegations of trading
misdeeds at Bank of America,
Janus, Strong, and Bank One
should prompt investors to
consider selling their stakes in
funds run by those firms.
The allegations of potential
trading abuses at Bank of America
are by far the most serious.
Spitzer has alleged that the bank
allowed a hedge fund, Canary
Capital Partners, to purchase
mutual-fund shares at that day's
closing net asset value after the market had already closed, a practice known as "late
trading." (Under normal circumstances, any fund order placed after the market's close will
be executed at the following day's closing price.) Such a practice, if it transpired as Spitzer
has alleged, represents a clear breach of securities law. Read on for our take on Bank of
America's funds in light of these serious allegations.
Spitzer has also alleged that Bank of America, Strong, Janus, and Bank One enabled the
same hedge fund to use their mutual funds to engage in market-timing--essentially,
quickly trading fund shares in an effort to profit from short-term market moves. In
exchange, the hedge fund agreed to make longer-term investments elsewhere in the fund
complexes. Market-timing, unlike late trading, isn't explicitly prohibited by securities laws.
But all four firms' fund prospectuses said they would discourage such activity. If Spitzer's
allegations prove true, it's a clear indication that all four fund firms were willing to put
their companies' own profitability ahead of the interests of their fund shareholders. Read
on for our take on the following firms in light of Spitzer's allegations of market-timing:
Bank of America
Janus
Strong
Bank One
Although we believe Spitzer's allegations are serious enough to warrant taking a hard line
on these four firms, we would urge investors to carefully consider their own
circumstances--including taxes and transaction costs--when deciding whether to sell. In
addition, this news, though dismaying, shouldn't undermine investors' trust in mutual
funds as a whole. Many fund shops--from behemoths like Vanguard and Fidelity to
boutiques such as Davis/Selected Advisors and Longleaf Partners--have long histories of
putting shareholders first. We continue to believe that mutual funds run by such
shareholder-friendly firms represent worthwhile investment opportunities for most
investors.
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