"International investing is fun, until you discover your fund owns stocks tarred by scandal. How can an investor avoid finding herself in this position?
In the dark
By Gretchen Morgenson
WHEN MORGAN GRENFELL Asset Management fired its
European Growth Fund manager in September for investing
improprieties, U.S. investors paid scant attention. So what if
the disgraced Peter Young made big bets on high-flying and
illiquid stocks, sometimes exceeding the limits of U.K.
securities laws? Few, if any, American investors held shares
in the $2 billion fund.
Peter Young may be gone. But some of the most speculative
stocks he favored remain, not only in the Morgan Grenfell
funds he managed, but also in six American-based funds.
Unreported in this country is the fact that some of these show
up in Dean Witter's International SmallCap Fund ($142
million assets) and its World Wide Investment Trust ($504
million assets). They also appear in four classes of a fund
managed by State Street Research: International Equity A,
B, C and D. Total assets in these four look-alikes: $86 million.
Of the roughly 100 European positions in Dean Witter's
International SmallCap Fund—accounting for 36% of the
entire portfolio—9 are companies that are found in Peter
Young's portfolio. Of the 138 European positions in the firm's
World Wide Investment Trust, 10 also appear in the troubled
Morgan Grenfell portfolio. State Street Research's funds
have 4 European positions in common with Young's
portfolio.
It wouldn't be so worrisome if the stocks common to these
portfolios were household names. They're not. They are, for
the most part, obscure companies that appear in few, if any,
other international mutual funds' holdings.
We're not talking minuscule money here. The second-largest
holding in the Dean Witter International SmallCap Fund is a
dubious Peter Young pick, SinterCast AB. One of his obscure
numbers, Ashurst Technology (formerly Emtech Ltd.), is the
sixth-largest holding of the State Street Research funds.
Why do these portfolios look so much alike? Their holders
may not realize it, but the funds are run by either Morgan
Grenfell or Morgan Grenfell alums.
Dean Witter has its own mutual fund subsidiary, called
Intercapital Asset Management, but it hired Morgan Grenfell
as subadviser to both Dean Witter funds. And the State
Street Research funds were run by Stephen Bamford, and a
team of former Morgan Grenfell money managers, until
Bamford left the firm in April. They are now run by Ian Vose,
a former money manager at Morgan Grenfell Asset
Management in London in the 1980s.
In the world of international investing, it's common for U.S.
fund companies to farm out portfolio management to
subadvisers presumably better acquainted with world
markets. Even though all advisers are identified in fund
prospectuses, few American fundholders likely realize their
investments are being managed by another firm. It is
especially unlikely that holders of the Dean Witter and State
Street funds realize that their money is being run by a firm
in the midst of a scandal.
Citing firm policy, Suzanne Platenic, a Dean Witter
spokesman, would not let Forbes talk to the fund managers
in question. Despite repeated requests, she declined to
provide details of the two funds' holdings. Asked whether
Dean Witter was reconsidering its relationship with Morgan
Grenfell, she said that the recent press regarding Morgan
Grenfell Asset Management had nothing to do with the
management of Dean Witter funds.
We can understand why the brokerage is reluctant to talk.
One of Dean Witter's top-ten holdings is in Sweden's
SinterCast AB—accounting for 1.1% of assets. This company,
which analyzes liquid metal, has an accumulated deficit of
$36 million. It is considered highly speculative and is also
found in Dean Witter's World Wide Investment Trust. Besides
Morgan Grenfell, which owns roughly $1 million worth of
SinterCast shares, no other fund company owns it, according
to Morningstar. SinterCast stock plunged from 370 Swedish
kronor to 205 on news of Peter Young's firing, and has
declined a further 9%.
Don't be sold funds by load-hungry stockbrokers. Do a little
homework and pick your own.
Earlier this year, the top holding in Dean Witter's
SmallCap fund was Norway's Oticon Holding, which
accounted for 1.2% of the fund's portfolio. It is a hearing aid
company with $150 million in sales, and with a 40 P/E
multiple.
Oticon has also made its way into Dean Witter's World Wide
Investment. The only other funds that own this stock are
Morgan Grenfell and an Invesco European fund.
Other holdings common to the Dean Witter and Morgan
Grenfell portfolios include Norwegian companies Hitec ASA,
an oil-drilling manufacturer; loss-ridden NCL Holding, the
parent company of Norwegian Cruise Lines; Nera AS, a
telecommunications company trading at 27 times earnings;
SensoNor, a manufacturer of electronic air bag sensors
which lost $3 million in 1995; and Sysdeco Group AS, a
software developer that has seen its stock fall from 210
Norwegian kroner in February to a recent 15.
As for the State Street funds, the biggest Peter Young
position is in warrants issued by Emtech Ltd., recently
renamed Ashurst Technology. The fund's sixth-largest
holding, Bermuda-based Ashurst says it's "an international
group engaged in the development and marketing of
advanced materials, technologies and business
opportunities in Ukraine." In the most recent quarter, Ashurst
lost $2 million on revenues of $1.1 million. Former State
Street money manager Bamford said he expected the stock
was a long-term pick.
What are investors getting for the outsize risks they appear
to be taking in these funds? Dean Witter's International
SmallCap, born two years ago, has badly lagged both the
Morgan Stanley World index and the S&P 500: It lost more
than 10% of its value in 1994 and gained only 2.9% the
following year. So far this year, it's up a paltry 5.5%. It has a
hefty 5% load.
Dean Witter's World Wide Trust has fared a bit better, but its
ten-year average lags the Morgan Stanley world index by
more than 3%. The fund was up 41% in 1993, then lost 7% in
1994 and gained 4.6% last year. Year-to-date, it's up 7.9%.
Load: 5%.
In existence since 1992, State Street Research's International
Equity funds have also disappointed. Year-to-date, all classes
are down 0.5% to 1.5%. The three-year-average annual
return is 6%, according to Morningstar.
How can mutual fund investors avoid this kind of hazard?
Take responsibility for your own investments. Don't be sold
funds by load-hungry stockbrokers. Do a little homework and
pick your own. If you're interested in buying an international
fund, stick with a time-tested manager. Three that pass
muster with Forbes: the Janus Worldwide fund, the USAA
Investment-Cornerstone Strategy and Fidelity Worldwide.
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